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INSTITUTES OF ECONOMICS 



A SUCCINCT TEXT-BOOK OF POLITICAL ECONOMY 

FOR THE USE OF CLASSES IN COLLEGES 

HIGH SCHOOLS AND ACADEMIES 



BY 




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ELISHA BENJAMIN ANDREWS D. 

President of Brown University 
Late Professor of Political Economy and Finance in Cornell University 



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BOSTON 

SILVER, BURDETT & COMPANY 
1889 



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Copyright, 1888 
By E. benjamin ANDREWS 




Typography by J. S. Gushing & Co., Boston 
Presswork by Berwick & Smith, Boston 



TO 



Hof-Rath Dr. Joh. A. R. von HELFERICH 

Professor of Economics and Finance in tiie 
University of Munici) 



By his former pupil 
THE AUTHOR 



apa ye y oiKovofiia CTrio-Ti^iys nvos ovofxa eanv (naTrep rj larpiKr] 

Kol ^ ^^aXKeVTtK^ Kol Tj TCKTOVlKTj ; . . . 7] Kttl WCTTrep TOVTWV tS>V 

Te^oiv €.\oifx.ev av eiTreiv o,Tt tpyov eKtio-Tr]^ outo) kol t^s olKOvofiia's 
SvvatfieO' av eiTretv o,Ti epyov air^s cctti; Soku yovv. 

Xenophon, Oikonojnikos, I, i, 2. 



PREFACE 



Two main motives have prompted the composition of this book, 
one concerning method, the other, doctrine. The most excellent 
manuals of Political Economy now in use seem to the author to 
involve two serious faults of method. One is that they nearly 
everywhere say too much, totally ignoring the instructor, and on 
most points leaving the pupil himself little thinking to do even 
when they stop short of positively confusing his mind in its efforts 
to construe the thought in its own way. The other is that they do 
^ot mark for the eye, in differences of type, any distinction between 
substantive and subsidiary material, their pages exhibiting prin- 
ciple and illustration, statement and amplification, clothed in equal 
dignity of form. It is believed both on psychological grounds 
and from much experience, that the best printed presentation of a 
subject for class-room purposes is the briefest which clearness will 
allow, leaving indispensable amplifications and illustrations to notes, 
and all fuller exposition to the teacher's wit or the student's search. 
This is the aim of the following pages. That the pupil, so soon as 
master of the essential idea, may be able to at once enlarge and 
tighten his grasp upon it through reading, most of the paragraphs 
are introduced by references to the best accessible authorities, more 
recondite works being at the same time named for the behoof of 
teachers. On collateral subjects of special importance the ablest 
convenient discussions are listed in notes. The analysis and ar- 
rangement of topics are in many particulars new, and it is hoped 
that some of the changes introduced will prove welcome. As the 
result of careful reflection, a prominence which may at first seem 
grotesque has been given to the paragraph-captions. Students will 
find this not merely a mnemonic convenience for the purposes of 
review and examination, but a most efficient objective help in grasp- 



Vi PREFACE 

ing the science. Touching the doctrine of this new class-book 
there is less to say. As Economics is now in transition many depre- 
cate all elTort at present to summarize it afresh. This logic, strictly 
taken, presupposes the advent, sooner or later, of a fixedness in 
the science which we fervently hope will never arise, since it could 
not but imply stagnation in economic thought. Meantime our best 
texts, with all that is true, profound, and well said in them, blend 
not a few propositions that what may be called the general judg- 
ment of progressive economists pronounces inadequate, misleading, 
or erroneous. Such are especially numerous in regard to the nature 
of Wealth, the scope of Economics, and in the weighty rubrics of 
Value, Money, Interest, Wages, and Profits. Nearly all our trea- 
tises, besides, betray from beginning to end a deceptive air, a wry 
ensemble, springing from writers' too sharp sundering of Economics 
from general Sociology. Whether the volume now offered to the 
public contains in these respects aught of true amendment, those 
who read and use it must judge. They will at any rate find in it, 
not always adopted but at least sympathetically mentioned so far as 
these are sufficiently non-technical to be named in a work of this 
character, the latest views which can with any propriety pretend 
to be settled. The book has been written during the odd moments 
of a very busy year, and it will be a wonder if the critic's keen 
glance shall not unearth in it some inconsistencies and errors of 
detail. The author will be happy to be notified of any such. He 
is indebted to several gentlemen for their kind pains in looking over 
the proof sheets as they have appeared. In this, Professor J. W. 
Moncrief, Ph.D., of Franklin College, has rendered a pecuHarly 
grateful service. 

E. BENJ. ANDREWS. 

July 3, 1889. 



TABLE OF CONTENTS 



INTRODUCTION 

I Economics Defined (i)* — § 2 General and Private Wealth (4) — 
§ 3 Economic Evolution (5) — § 4 Economics a Science (7) — § 5 
Modern (8) — § 6 Its Origin (9) — § 7 The Mercantile System (10) 

— §8 Progress (12) — § 9 Physiocracy (14) — § 10 Adam Smith (15) 

— §11 The Smithian School (17) — § 12 The Historical or Apos- 
teriori Tendency (19) — §13 Professiorial Socialism (20) — §14 The 
Socialists Proper (23) — § 15 Our Viev/ (25) — § i6 Value of the 
Study (28) — § 1 7 The Division of Economics (30) 



PART I 

PRODUCTION 

Except as Involving Exchange 

CHAPTER I 

THE NATURE OF PRODUCTION 

§ 18 Various Views of Productivity (31) — § 19 Wealth-Increment 
which is not Production (33) — § 20 Production (34) — § 21 Special 
Remarks on Production (36) — § 22 The Conditions of Production (38) 

CHAPTER II 
THE ABSOLUTE CONDITIONS OF PRODUCTION 

Nature — Labor 

§ 23 The Materials of Nature (40) — § 24 The Forces of Nature (42) 
— § 25 Labor : its Necessity (43) — § 26 Its Forms (44) — § 27 Its 
Relation to Nature (45) 

* Figures in brackets refer to pages 



viii TABLE OF CONTENTS 

CHAPTER III 
THE RELATIVELY ABSOLUTE CONDITIONS OF PRODUCTION 

Capital — Social Organization 

§ 28 Capital Defined (47) — § 29 Kinds of Capital (48) — § 30 The 
Place of Capital in Production (50) — § 31 Society (52) — § 32 The 
State i^z) 

CHAPTER IV 
THE RELATIVE CONDITIONS OF PRODUCTION 

§ 2)2) General View (55) — § 34 Diminishing Return and Increasing 
Return (56)—$ 35 The Labor-Force: Extent (57)— § 36 The 
Labor-Force : Quality (59) — § 37 Socialism and Production (62) 

CHAPTER V 

THE RELATIVE CONDITIONS, CONTINUED 

§ 38 Extraneous Aids to Labor (64) — § 39 Geography and Topography 
(64) — § 40 Material Capital in General (66) — § 41 Machinery (67) 
— § 42 Unembodied Invention (68) — § 43 The Organization of Indus- 
try (69) — § 44 The Same in a Special Aspect (71) — § 45 Evils and 
Limitations (72) — § 46 The Form of Undertaking (73) 

CHAPTER VI 

COST AND CONSUMPTION IN PRODUCTION 

§ 47 Metaphysical Cost (76) — § 48 Mercantile Cost (78) — § 49 Con- 
sumption (79) — § 50 Waste and Thrift (80) 



PART II 

EXCHANGE 

Except as Involving the Science of Money 

CHAPTER I 

THE NATURE OF EXCHANGE 

§ 51 In Rude Societies (83)— § 52 Philosophy (85)— § 53 Intrinsic 
Advantages (86) — § 54 Reach of Influence (87) — § 55 The Per- 
fection of Exchange (90) 



TABLE OF CONTENTS IX 

CHAPTER II 
INTERNATIONAL EXCHANGE 

§ 56 Initial View (92) — §57 Common Ground (94) — §58 The Theory 
of Nutrient Restriction (96) — § 59 Continuation (98) — § 60 Impor- 
tant Specific Points (99) 

CHAPTER III 
VALUE: GENERAL 

§ 61 Value and Value (102) — § 62 Value in Use (103) — § 63 Value 
in Exchange (105) — § 64 Price (107) — § 65 Normal Value in Ex- 
change (107) 

CHAPTER IV 
VALUE: PECULIAR PROBLEMS 
§ 66 Competition and Value (no) — § 67 Monopoly Value (112) — 
§ 68 Values between Non-Competing Groups (113) — § 69 Complex 
Cases of Value (114) — § 70 A Measure of Exchange-Value (115) — 
§ 71 The Value of Futures (117) 

PART III 

MONEY AND CREDIT 

CHAPTER I 
THE NATURAL HISTORY OF MONEY 

§ 72 Barter (118) — § 73 Primitive Money (119) — § 74 Money Proper 
(120) — § 75 The Money Metals (121) — § 76 Mode of their Dis- 
tribution (124) — § 77 BimetalUsm (125) 

CHAPTER II 
BANKS AND PAPER MONEY 

§ 78 Banks of Deposit (128) — § 79 Developed Banking (129) — § 80 
Government Paper (130) — § 81 Historical (131) 

CHAPTER III 
THE THEORY OF MONEY 

§ 82 The First Function of Money (134) — §83 The Second Function 
(135) — § 84 Other Offices of Money (136)— § 85 The Value of 
Money (137) — §86 Paper Money (139) — § 87 Ideal Money (141) 



X TABLE OF CONTENTS 

CHAPTER IV 

CREDIT 

§ 88 The Nature of Credit (143) — § 89 Credit and Crises (144) — § 90 
Further Abuses of Credit (145) — § 91 Free Banking (146) — § 92 
The John Law Theory (147) — § 93 Fiat Money (148) 

CHAPTER V 

THE CLEARING SYSTEM 

§ 94 Settlements by Check (151) — § 95 International Payments (153) 
— §96 Special Modifiers of the Rate of Exchange (156) 



PART IV 

DISTRIBUTION 

CHAPTER I 

THE NATURE OF DISTRIBUTION 

§97 General Statement (158) — § 98 Categories and Shares (159) — 
§ 99 Blending (161) — § 100 The Law of Equal Returns to Last 
Increments (162) — § loi The Other General Laws of Distribution 
(162) — § 102 The Fifth Category (164) 

CHAPTER II 

RENT 

§ 103 Rent in General (165) — § 104 Ground Rent (166) — § 105 Rent 
and Price (167) — § 106 Pecuhar and Nominal Rents (168) — § 107 
Controversy (169) 

CHAPTER III 

INTEREST 

§ 108 The Nature of Interest (171) _§ 109 Loan Interest (172) — 
§ no The Rate on Loans (173) — § in Inflation and Interest (175) 
— § 1X2 Usury Laws (176) 



TABLE OF CONTENTS XI 

CHAPTER IV 

\VAGES 

§ 113 Definition (178)— § 114 Cause and Source (179) — § "5 Devel- 
oped Wages (180)— § 116 The General Rate of Gross Wages (181) 
— §117 The Residual Claimant Theory (182)— § 1 18 The Truth 
(183) — § 119 Concluding Points (184) 

CHAPTER V 

PROFITS 

§ 120 Terminology (186) — § 121 Undertakers' Profits (187) — § 122 
Undertaker-Talents (188) — § 123 Profits, Prices, Wages (189) 



PART V 

CONSUMPTION 

CHAPTER I 

NEED 

§ 124 To Resume (190) — § 125 Elasticity of Need (191) — § 126 
Fashion and Progress (192) — § 127 Legitimacy of Need (193) 

CHAPTER H 
ECONOMY IN SUPPLY 

§ 128 Generic Principles (195) — § 129 Specific Principles (195) — 
§ 130 Prevention of Loss (196) — § 131 Luxury and Idle Wealth 
(197) 

PART VI 

PRACTICAL TOPICS INVOLVING ECONOMIC THEORY 

CHAPTER I 

COIN CURRENCY IN THE UNITED STATES 

§ 132 Colonial Times (200) — § 133 Earliest National Coinage (201) — 
§ 134 The Dollar of the Fathers (203) — §135 Remonetization (204) 
— §136 The Future (206) 



Xll TABLE OF CONTENTS 

CHAPTER II 

PAPER CURRENCY IN THE UNITED STATES 

§ 137 Early (208) —§ 138 Thence to the Civil War (208) — § 139 Gov- 
ernment Paper (209) — § 140 Government Banking (210) — § 141 
The National Bank System (212) 

CHAPTER III 

OUR PAPER CURRENCY IN FUTURE 

§ 142 Present System (213) — § 143 Difficulties (214) — § 144 Proposed 
Change of Basis (215) — § 145 Probable Outcome (216) 

CHAPTER IV 

TAXATION 

§ 146 General Principles (218) — § 147 Direct and Indirect Taxes (219) 
— § 148 Norms of Direct Taxation (220) — § 149 Taxation of Income 
(221) — §150 Emergency Taxation (222) 

CHAPTER V 

POVERTY 

§151 The First Class of Remedies (223) — § 152 The Second Class 
(224) — § 153 Ultimate Help (225) 



INSTITUTES OF ECONOMICS 



o>9ic 



INTRODUCTION 



§ I Economics Defined 

Cossa, Guide, ch. i. MiH, Essays, 1829, on Method in Pol. Ec. Stdgwick, on do., 
Fortnightly, 1879. Roscher, Grundlagen, Einl., ch. i. Cohn, Grundlegung, 
Einl., chaps, i, ii, iv. Gamier, Traite d'ecoti. po!.,()i2-$. 

Economics^ is that branch of learning conversant 
about general wealth, wealth being the collective 
name for all those categories ^ of things, powers,^ rela- 
tions, and influences, which both result from conscious 
human effort and directly* contribute to human wel- 
fare in its temporal aspect. Single pieces or elements 
of wealth may be called * goods'^ or * values.*^ No- 
tice in this definition (i) that not all wealth is of a 
material ^ nature, and (ii) that the mark * exchange,' 
though helpful in forming the conception of Econom- 
ics, is accidental rather than fundamental thereto, 
since a study substantially the same might exist if 
men did not exchange. Economics, in discussing 
wealth, has of course also to canvass the condi- 
tions^ of wealth. 



2 INTRODUCTION 

1 Originally and by etymology, "house-management," yet not indoor 
merely or mainly. oIkos meant " estate," " property." Macleod, Ele- 
ments, vol. i, 132. Bacon still used eco7ioniia in its classical sense. The 
title " Political Economy " \_i,co7tomie politique^ first by Montchretien de 
Watteville, in 161 5. It is still in excellent use, but "Economics" is 
clearer as well as briefer. Roscher, § 16, following Uhde, who intro- 
duced the word in 1849, prefers Oekono??iik to name economic science, 
using Oekonomie to mean economic life. Few if any have followed this 
distinction, and Cohn, p. 5, explicitly repudiates it, sticking to Oekonomie 
as appellation for the science. Cf. § 3, below. 

2 Isolated articles may be wealth, though costing no labor, as an aerolite 
of gold falling at your door, or a pasture-weed discovered to be a specific. 
But the classes of goods in which these examples belong are gotten only 
by labor. 

3 So far as they fall under the definition, i.e., spring from man's effort 
and make for his welfare, powers, intellectual or physical, relations, as the 
good name or the custom of a business house, and influences, such as a great 
advocate's reputation gives, are no less truly wealth than houses, garments, 
or bread. If the definition of wealth as always material is simpler, which is 
certainly the case in expounding Distribution, it is less deep and truthful. 
Why, e.g., term medicine wealth, yet deny the name to the skill able to 
cure without medicine? In crucial analysis, material wealth itself becomes 
wealth only in and through its immaterial relationships. Wheat is not 
wealth merely because so and so constituted physically, but because it is here 
instead of beyond reach, adapted to our constitution, and not repugnant to 
our taste. Now these relations are not material entities at all. Millions 
of goods that have length, breadth, and thickness, would be turned to 
refuse by trifling supposable changes in the psychical side of our sensi- 
bility. This is a most important consideration; though it is of cour-se quite 
possible to frame a system of workable economic definitions on the material 
basis. So doing, we should style these powers etc. [immaterial wealth], 
conditions of wealth [note 8] . Bohm-Bawerk, Rechte und Verhaltnisse. 

* There are high elements of character, perhaps also physical products, 
like unsalable keepsakes and family heirlooms, which are the creatures 
of effort and have a certain bearing upon our well-being, yet in so remote 
a way that it is unnatural to reckon them as wealth. 

^ Most German writers approach the definition of Economics from the 
notions of " needs " and " need-satisfiers " or " goods." Cutting off non- 
temporal goods on the one hand and gratuitous ones on the other, they 
fence out the same economic field which our definition covers. Thus, — 



INTRODUCTION 



CO 

E 



non-temporal 

NEED-SA 



S temporal 

lis FloERS OR GOODS 



gratuitous 



^ In the sense of " labor-requiring utilities," but not in any meaning 
which would involve the idea of exchange. Cf. note 7. For the force 
here assigned to "value," see the Chapter on this topic in Part II. Cf. 
Roscher, § 5 and notes. 

^ Contrary to the " catallactics-theory " of Economics, held by Con- 
dillac, Bastiat [Harmonies, ch. iv], Whately, Macleod, and Perry [Ele- 
ments, ch. iii], which builds the study entirely about the conception of 
exchange as centre, reducing it to an investigation of exchange-value. 
This procedure at first attracts by the simplicity it seems to impart, but is 
gravely unscientific. Exchange is not the substance of man's economic 
life, but an incident, though an important one. We can easily conceive 
a very complete set of economic phenomena, calling for investigation and 
offering full basis for a science of Economics, exchange being totally absent. 
Suppose a number of Robinson Crusoes [cf. Roscher, p. 5], some well off, 
some ill off. There would be reasons for the difference, inviting study. Pio- 
neers in new lands exchange little, yet vary greatly in weal. So the Indians 
before the whites cam6, and so, still better, the ancient Peruvians. This is 
the chief objection to the theory named, but far from the only one. Mill, 
Principles, bk. iii, ch. i, § I. Q{. post, § 3, n. 9. 

^ " Object-phenomena of Economics," that is, is a broader conception 
than " wealth," including things, circumstances, etc., helpful to wealth, and 
things, circumstances, etc., unfavorable to the same. Original fertility of 
the soil, with mines, water-powers, and the other "natural" wealth of any 
country, would illustrate what is meant by conditions of wealth. So 
would the native endowments of the people which aid thrift and accu- 
mulation, and also any acquired powers having the same tendency, if 
built up without conscious aim. The state is a prime condition of 
wealth. At this point again, however, imperfect definition need not 
prevent clear insight. 



INTRODUCTION 



§ 2 General and Private Wealth 

Siorck, Zur Kritik d. Begr. von NationalreicJithum [1827]. Marshall, Economics 
of Industry, § 7. Hawley, Quar. Jour. Econ., vol. ii, 365 sqq. Inaina-Sternegg, 
Vom NaiioHal-Reichikut7t, Dejitsche R^indschau, June, 1883. Neumann-Spal- 
lart, Weltivirtschaft, Jahrg. 1883-4, pp. 8 sqq. Schmoller, Forschungen, VII. 

General, national, or cosmic wealth is not merely 
the summed possessions^ of individuals and mercantile 
corporations. Immaterial ^ wealth and public property 
must be reckoned in, and either titles or the things to 
which they entitle omitted.^ Valid titles held by per- 
sons in one land to values in another are, however, 
part of the first land's wealth ; but all such rights have 
to be excluded from an inventory of the world's wealth. 
In estimating general wealth the test of exchange^ value 
has but very limited application. 

1 " The wealth of the country being the aggregated wealth of its citi- 
zens," Gannett, in Int'l Rev., vol. xii. Mulhall computes the world's 
wealth at about 255 billion dollars: lands and forests 84^ billion, cattle 
lOg- billion, railways 20, houses 61, furniture 30J, merchandise b\, bullion 
nearly 5, shipping 15^, other forms of material goods nearly 20. He de- 
parts from Gannett's loose maxim so far as to reckon in public works, — 
at 15 J billion. As to the rest he probably estimates by exchange value 
[see n. 4]. Computing as he does, and omitting public works, we may 
place the whole wealth of the United States in 1888 at 51 billion, the 
yearly earnings at from 10 to 12, the yearly savings at 900 million, 
and the daily [week-day] savings at 3 million. Such approaches to 
fact are valuable for comparison of nation with nation and section with 
section, still are approaches only. The same is true of the following 
wealth-statistics from the United States Census Reports. 







The Nation's 


Percentage of 


Percentage of 


Average No. 


Census of 


Population 


Wealth: Millions 


Increase in 


Increase in 


of Dollars 






of Dollars 


Population 


Total V/ealth 


per capita 


1800 . . . 


S.3°S,937 


1,072. 


35.02 


43- 


202.13 


1810 








7,239,814 


1,500. 


36.43 


39- 


207.20 


1820 








9,638,191 


1,882. 


33-13 


24.4 


195. 


1830 








I2,866,Q20 


2,653- 


33-4° 


41. 


206. 


1840 








17,069,453 


3.764- 


32.67 


41.7 


220. 


1850 








23,191,876 


7,135-8 


35-87 


89.6 


307.67 


i860 








31,500,000 


16,159. 


35-59 


126.4 


514- 


1870 








38,558,000 


30,069. 


22. 


86.1 


780. 


1880 . . . 


50,155,783 


43,642. 


30. 


45- 


870. 



INTRODUCTION 5 

2 The immaterial variety is never referred to in listing wealth. The 
chief reason for the omission is the indefiniteness of the thought and the 
difficulty of appraising immaterial riches in dollars and cents. But assuredly 
it ought not to be ignored. Dollars cannot measure the superiority of health 
to sickness or of satiety to hunger, yet these differences are as thinkable and 
important as they are familiar. 

3 If a mortgaged farm is put down for its whole worth and the mort- 
gage too, evidently all the property covered by the mortgage is twice told. 
So of a railway and its stock or bonds. In case of a great corporation, if 
we are summing up the nation's wealth, a careful inventory would be a much 
safer index than the market value of the stock. A given patent or copy- 
right is no increment to the national wealth, though a good system of such 
rights might be. Certain credit-instruments are wealth [§ 84, n. 3, § 86, n. 3]. 

* Even Knies, Geld, 23, takes money-exchange power as practically his 
criterion of wealth. But there is a vast deal of every land's wealth whose 
proportion to the whole is not so much as indicated by its power, if it has 
any, in exchange. How little would roads and streets sell for in compari- 
son with the contribution they make to the community's welfare? Good 
sewers are worth all they cost and usually much more, but could not be 
sold at all. 

§ 3 Economic Evolution 

Schaeffle, Bau u. Leben d. socialen Korpers, vol. iii, 402, sqq. Schoenherg, Hand- 
buck d. Pol. Oek., vol. i, ch. i. Cohn, 91-93. Hyndman &= Morris, Summary of 
Socialism. 

In man's economic life ^ hitherto and now the follow- 
ing more or less clearly defined stages or gradations ^ are 
discernible : (i) the hunting,^ (ii) the pastoral,* (iii) the 
agricultural, (iv) the manufacturing and commercial, 
and (v) that of credit, free contract, and giant indus- 
tries. In (i), man is totally dependent on nature, hard- 
worked and poor. Industry has no diversity, war is 
incessant and population scant and homogeneous. Com- 
munity of property^ prevails, and there is neither 
exchange nor money. The succeeding stages witness 
progressive improvement in all these particulars. In 
this, to a good degree, civilization consists. Slavery^ 



6 INTRODUCTION 

and other forms of • social cleavage begin with ii, also 
exchange and the genuine unrest of life and growth. 
In iii, industry becomes greatly diversified/ and man, 
no longer her slave, largely determines what nature 
shall produce. He settles in communities. I^aw and 
the state develop, military system and new social 
formations rise. Of iv, city life, the division of labor, 
exchang-e, and metallic^ money are the chief marks. 
Slavery now goes down and a separate wag-es-class 
emerges. Law and the state assume higher and more 
complex forms, and leisure makes possible the amass- 
ing of intellectual wealth. Stage v is that at which 
America and West Europe now are.^ 

^"Life" as opposed to "doctrine" \_Wirtschaft : Wirtschaftslehre\, 
Of course men have always had an economic experience of some sort, 
but the study of this is a recent matter. Cf. § 5. Sound economic doctrine 
must be based upon large knowledge of economic life. 

^ " Gradations " as well as " stages," because certain peoples, the Esqui- 
maux, Bushmen, and Hottentots, e.g., do not seem to improve at all. 

3 Fishing tribes are on substantially the same plane with hunters, both 
these being " occupatory " industries '\_occupare in Roman law = to take 
possession of], but fishers are usually the better off, have the denser popu- 
lations, sometimes own slaves, and are apt, instead of becoming shepherds 
and farmers, to grow first into pirates, then into ocean-carriers. 

* Pastoral peoples are always nomadic as well, driving their herds from 
place to place to find the best pastures [Genesis, ch. xiii] . 

^ Except perhaps in personal clothing and each man's kit of utensils for 
taking and skinntag animals, etc., and for war. 

^ Hunters could utilize slaves only by giving them arms, which would 
render them dangerous; but shepherds may employ them for herdsmen. 

' That is, though agriculture forms the staple calling, the lower kinds of 
industry still continue. Besides, many ancillary trades are now demanded, 
as those of smiths and wood-workers. 

^ Metal money has been found among pastoral nations, gotten probably 
in the way of exchange with those more advanced. Cattle [so pecunia, from 
pecus, " Cattle " and " capital " are originally the same word, from capui 



INTRODUCTION 7 

through capiialis, <?] are their common medium of exchange. Slaves, 
too, are so used. In stage i barter prevails. For the difference between 
barter and money, see in Part III. Ancient society at this general level 
(iv) differed from modern. It did not reject slavery, and its cities sprung 
from commercial not from manufacturing necessities. Greece and Rome 
had no factories, whence to form cities like Lowell or Paterson. There 
were at Athens, indeed, immense workshops, where thousands of slaves 
wrought, but apparently they did not exist to secure division of labor. 
Blanqui, vol. i, 31. 

^ The stage on whose phenomena all the current English works in Eco- 
nomics are based, — Adam Smith, Ricardo, Mill, Senior, and the numerous 
manuals which have been published this side the Atlantic. Only quite 
recently have economists seen the need of a broader historical outlook. 
Cf. §§ II, 12. For a graphic comparison between xivth and xixth century 
society, see H. C. Adams, Outline of Lectt. upon P. E., 67 sq, 

§ 4 Economics a Science 

Marshall, Ec. of Ind., § 2. Mill, Logic, bk. vi, ch. iii, cf. ch. vi. Schurman, Eth. 
Import of Darwinism, ch. i. Wagner, in Quar. Jour. Econ., vol. i, 117 sqq. Cohn, 
Eitil., ch. ii. Roscher, Einl., ch. ii. Cossa, pt. i., ch. iv, pt. ii, ch. i. Newcotnb, 
Princt. Rev., Nov. 1884. Cairnes, Logical Method, i, ii. 

As Economics canvasses phenomena in classes, and 
ascertains and expounds their underlying laws, it may, 
however inexact and as yet incomplete, justly be re- 
garded a science.^ In this character it is partly de- 
ductive, partly inductive, the first as applying certain 
already admitted laws of human nature and of physics, 
the second, inasmuch as by the aid of observation, ex- 
perience, statistics, and history, it sets forth the concrete 
working of these laws and finds out others. 

1 See Mill, as above, ch. vi, also chaps, ii, x, xi. It has been objected 
that Economics cannot be a science because man's will is free. But free- 
dom and action under law are not incompatible. The notion that there is 
no science but exact science is as vicious as it is common {_der iiber den 
Strang der " Exactheif" schlagetider Naturforscher, Schaeffle, Letters, 
15]. A science may be called exact when the causes and laws with which 
it deals are not only knowable but known. Pure mathematics approaches 



8 INTRODUCTION 

this character nearest. A potentially exact science, whose causes and laws 
are in their nature knowable but not yet studied out, as meteorology and 
tidology at present, might be styled " incomplete." " Inexact " are those 
sciences where occult causes, whose working the human mind with its 
present powers is unable to trace, more or less perturb the action of the 
knowable and known causes. All the social sciences, including Econo- 
mics, are of the last order, as, in a degree, are all those which have to do 
with life. Study § 15 [and notes] along with this one. 

§ 5 Modern 

Ingram, Hist, of Pol. Ec, chaps, i, ii. Perry, Elements, ch. i. 

The science is of recent origin. In ancient, and 
even in mediaeval times, while many true notions re- 
garding it were advanced, as by Plato, Aristotle, Xeno- 
phon and the Roman lawyers, ^ its facts were too little 
observed and reduced to order to constitute a science. 
The real springs of public prosperity were either un- 
perceived or not investigated.^ Slavery was universal, 
the accumulation of wealth decried.^ Industry and 
the mechanic arts were despised, wars continual, and, 
as to property, far more destructive than now, subju- 
gated lands laid waste, and no means recognized of 
enriching one country but plundering others, 

^ Thus Plato has these worthful aper^us : . gold and silver not valuable 
in se; too much gold possible; the advantage of the division of labor [the 
last, shared by all the ancients above named]. Aristotle distinguishes 
utility from value and natural wealth from artificial. Xenophon descries 
the true nature of wealth, of money, and of prices, Demosthenes that of 
capital [acpopfx't), epaj'os]. D. extends the notion to cover incorporeal cap- 
ital. Ulpian neatly defines property [not wealth] as what can be bought 
and sold: Ea enim res est quae emi et venire potest. But all these 
writers, to mention no more of their false ideas, believe in slavery and 
over-value money. Is Horace consciously arguing against the bullion 
theory [§ 7, n. 3] at Sat. I, i, 40-45, "Unless you reduce your gold-pile 
it has no beauty"? On the Roman authors of economic ideas, Ingram, 
18 sqq. 



INTRODUCTION 9 

2 The only wealthy nations of antiquity which bred minds capable 
of pursuing such a study were Athens and Rome, precisely the ones 
whose entire economic development was artificial. They became 
rich by exploiting, one the Confederacy of Delos, the other the 
world. 

8 Cicero, de officiis, i, 42, perfectly sets forth in this matter the spirit of 
the classical world : Illiberales autem et sordidi quaestus mercenariorum 
omnium, quorum operae, non artes emuntur. Est autem in illis ipsa 
tnerces auctoramentum servitutis. Sordidi etiam putandi, qui mercantur 
a mercatoribus quod statim vendant, nihil eni?ti proficiant, nisi admodum 
mentiantur. Nee vero est quidquam turpius vanitate. Opijicesque omnes 
in sordida arte versantur ; nee enim quidquam ingenuutn habere potest 
officina. . . . Quibus autem artibus aut prudentia tnajor inest, aut non 
mediocris utilitas quaeritur, ut medicina, ut architectura, ut doctrina 
rerum hottestarutn, eae sunt iis, quorum ordini conveniunt, honestae. 
Mercatura autem, si tenuis est, sordida putanda est; sin magna et copiosa, 
multa undique apportans, multaque sine vanitate impertiens, non est 
admodutn vituperanda. . . . Omnium autem rerum, ex quibus aliquid 
acquiritur, nihil est agrietittura melius, nihil uberius, nihil dulcius, nihil 
homine libera dignius. 

§ 6 Its Origin 

Blanqui, chaps, xiv-xxx. Ingram, ch. iv. Laughh'n, ed. of Mill, Int. Sketch. 

The necessary new thought was turned to economic 
facts mainly through : i Commercial activity during and 
after the Crusades,^ and especially after the period of 
discovery began, ii Rise of prices incident to the in- 
creased bulk 2 of the precious metals consequent upon 
opening the American mines, iii Frequent debase- 
ment of monies by monarchs.^ iv New need of reve- 
nues and the changed mode of raising these, attend- 
ing the transition from feudalism to modern states.* 
V Questions of trade arising in the application of the 
European colonial system.^ vi Enlarged acquaintance 
with the economic conceptions of the Roman law.^ 
vii The development and organization of credit. 



lO INTRODUCTION 

1 The greatness of the famous merchant cities, Venice, Genoa, Pisa, and 
Amalfi, now began. Commerce and business were henceforth reputable, 
and men engaged in them could be raised to the nobility. The Hanseatic 
League dates from about 1260, ten years before the last crusade. On this 
see Blanqui, ch. xvi. 

^ The general law is, the more money in circulation the less the pur- 
chasing power of each piece, and the higher the range of prices. See the 
discussions of Part III. 

^ Their regular resort for centuries so often as impecunious. The usual 
mode was, while leaving the face of the coins unchanged, to abstract part 
of the true metal, putting baser in its place. Not seldom they would force 
the money so debased into circulation at its face value, and accept it only 
at its real value. So did Emperor Ferdinand II in Bohemia, 1620. 

* This change involved paid armies, costly ministries and embassies and 
the expensive pomp and circumstance of great courts. Systematic taxa- 
tion and fiscal machinery had to be resorted to, enforcing economic study. 

^ See Blanqui's excellent chapter [xxiii] on this. Every nation which had 
colonies regarded and used them simply as means for enriching the mother 
state. There were three different plans for accomplishing this : i Spain 
and Portugal kept colonial trade in the hands of the government, ii Hol- 
land, Sweden, Denmark, and France till 1 720, placed it exclusively in the 
power of a gigantic stock company, iii England [Lecky, Eur. in xviiith 
Cent., vol. ii, 8 sqq.], also France after 1720, effected a national monopoly 
by navigation laws practically to exclude foreign vessels from visiting their 
colonies. Here again was necessity for study. 

^ Roman law was at no moment in the middle age disused or unknown, 
but the discovery, at the sack of Amalfi, 1135, of the Florentine copy of 
the Pandects immensely stimulated the study. 

§ 7 The Mercantile System 

Ingram, ch. iv. Ad. Smith, Wealth of Na., bk. iv, ch. i. Roscher, Gesch. d. Nat. 
Oek. in Deutschland, 228 sqq. Perry, Elements, ch. xiv. Blanqui, chaps, xxvi- 
xxix. Schoenberg, vol. i, 63 sqq. Cossa, Guide, 119 sqq. Cohn, 94-100. 

While much vigorous economic thinking^ was done 
in the middle age, especially by the canon lawyers, the 
earliest serious efforts to arrange economic data as an 
orderly whole were made in France, resulting, provis- 
ionally, in the so-called Mercantile System.^ This, 



INTRODUCTION 1 1 

neglecting agriculture, magnified other businesses, 
and commerce in particular, yet, regarding money as 
the most real form of wealth,^ insisted that in order to 
profit by trading, a nation must have the * balance of 
trade'* in its favor, work mines, tax imports, subsi- 
dize exportation, and conduct its whole policy with the 
view of amassing the greatest possible hoard of the 
precious metals. To this end ubiquitous governmental 
regulation of industries was necessary, with privileges 
and monopolies to all inland business deemed import- 
ant, also encouragement to domestic shipping, discour- 
agement to foreign. These notions, while more explicit 
in France, were common to all Europe, and determined 
the character of economic and international politics for 
centuries. Not even yet are they fully overcome.^ 

1 Particularly upon money and the problem of a fair price \Jtistum 
pretitini]. The latter was discussed by every great theologian from St. 
Augustine down. This renowned doctor condemns the man who would 
vili emere et caro vendere, and after him the whole medieval church 
taught that such a practice was wrong. By justum pretium was meant 
cost, including labor and time of the salesman in getting, keeping, and sell- 
ing his ware. The principle of supply and demand as price-determinant 
was, so far as recognized at all, denounced as necessarily unrighteous. Far 
clearer was mediceval thinking on the subject of money. Nicolas Oresi- 
mus, bp. of Lisieux, \ 1382, has left us a sermon containing a theory of 
coinage almost exactly modern in its ideas. From the schoolman, Gabriel 
Biel, we have another monetary discussion of decided worth. 

2 Sometimes styled " Colbertism," after Colbert, the distinguished min- 
ister of Louis XIV. On Colbert's views, Roscher, as above, 229, and 
Blanqui, ch. xxvi. The latter will have it that the system was Italian in 
origin, and brought to honor by Spain, and that in spirit Colbert was not a 
mercantilist at all. His mercantilist views were certainly more moderate 
and sensible than most of those advanced by his school. Cromwell was 
the chief, though far from the only, English ruler to push the mercantilist 
policy. Frederick the Great, also his father, did the same for Prussia. 



12 INTRODUCTION 

3 The "bullion theory." Blanqui [i, 223, ch. xviii] dates Mercantilism 
from 1303, when Philip the Fair forbade the exportation of gold and silver 
from France. An English law of Edward Ill's time swears inn-keepers in 
seaport towns to search their guests to prevent the exportation of money or 
plate [H. Spencer, The New Toryism, 8]. Even Locke strongly advo- 
cated the policy of piling up gold and silver in the country. All nations 
had laws to effect this. Yet Ad. Smith, bk. iv, ad. init., Garnier, " Physi- 
ocrates," in Lalor's Cyclop., and most critics state it too strongly when 
they accuse the mercantilists of really identifying money with wealth. 
No men could ever be so foolish. They greatly overvalued it, however, 
relatively to other wealth, just as thoughtless people do now. For the 
error of this view, see § 9. It arose partly from the ready serviceableness 
of money for all purposes, partly from the need which each nation then 
felt of a great hoard of gold and silver for war, and partly from mistakenly 
comparing a nation to a manufacturing town, taking in raw material to be 
worked up and sold for money [next note] . 

* Thomas Mun said : " The secret means to enrich the nation is to sell 
each year to foreigners more wares than we consume of theirs," receiving 
the balance in money, of course. The older mercantilists believed that 
money should never, under any circumstances, be permitted to go " forth 
of the realm." Mun and the newer school held differently. They re- 
garded its exportation sometimes profitable, as a means of getting back 
much more, and likened the outgo and return to seed-time and har- 
vest. The Emperor Charles V forbade Spain to export precious metal or 
raw material. An imperial decree in Germany, 1500, commanded tailors 
to work up none but domestic cloth. 

5 Daily one may read in the newspapers expressions to the effect that 
fortune is smiling upon us if we happen to be importing gold, frowning if 
the same is leaving us. As if a land could not be money-poor ! Or as if 
it were possible for all our money to desert the country ! And Mercantil- 
ism at large is spoken of even by competent economists as, for past times, 
" relatively justifiable." 

§ 8 Progress 

Ingram, 51 sqq. Gamier, " Physiocrates," in Lalor. Horn, L, Econ. Pol. avant les 
Physiocrates. Cohn, 101-107. Cossa, pt. ii, ch. iii. 

During the XVIIth and XVIIIth centuries, economic 
topics were discussed by many German writers, com- 
monly in a narrow, mercantilist spirit,^ yielding few 



INTRODUCTION I3 

valuable insights, and mostly without discovery of the 
nexus between these. More advance was made in 
Eng-land. Sir William Petty,^ b. 1623, argued that 
value originates in labor, and demonstrated the advan- 
tages that flow from the division of labor. He likewise 
anticipated Ricardo's law of rent and theory of wages. 
Sir Dudley North, 1691, affirmed that the whole world 
is, as to trade, one nation, that laws cannot fix prices, 
that money is merchandise, subject to glut as well as to 
scarcity, and that all special governmental favor to any 
one interest is an abuse, cutting off so much benefit from 
the public. Locke, 1690, 1695, noted the distinction 
between utility and value, and denied the ability of gov- 
ernments to fix the purchasing-power of money. Hume^ 
showed, 1752, that wealth consists not in money but in 
the supply of wants, and that the prosperity of one land 
is the prosperity of all. Berkeley, in his Querist,* i/S^, 
questioned ' whether it were not wrong to suppose land 
or gold and silver either to be wealth.' While, till 
Hume, no English writer appreciated Petty and North, 
similar views were championed with exceeding zeal in 
France by Boisguillebert,^ Vauban, F^nelon, Montes- 
quieu, and Cantillon. 

^ Zincke, 1692-1 769, was the only noteworthy exception. See Ingram, 80. 

2 On Petty, see Wirth, in Braun's Vierteljahrschrift, 1863, pp. no sqq. 
He was one of the most versatile of men : — pedler, sailor, physician, 
draughtsman, inventor, scientific writer, land-surveyor, organizer of busi- 
nesses. His education was but ordinary, gotten mainly at the grammar 
school of Romsey, in Hampshire, his native town, though he had studied a 
little at the University of Caen, Normandy. In youth distressingly poor, 
he became rich, leaving an ample fortune to his son, who was created 
Baron Shelburne, and founded the Landsdowne family. Petty, so early, 
ably discussed, and answered negatively, the question so much agitated 
still, whether government can establish a permanent value-relation between 



14 INTRODUCTION 

gold and silver. This in ch. x of his Pol. Anatomy of Ireland, published 
in 1 691 among his posthumous works. 

3 Ad. Smith's personal friend and chief British forerunner as an 
economist. 

4 First published in 1735. 

5 On these Frenchmen, see Ingram, 57 sqq. Fenelon's Telemaque did 
more than anything else to popularize the new views in France. Cantillon was 
a French merchant of Irish extraction. He is hardly distinguishable from the 
physiocratic writers. Jevons accounted him the founder of that school and 
so of economic science. He deserves this eminence no more than Bois- 
guillebert. Both differ from the regular physiocrats in relative failure to 
array their insights as a system, and in making less of the law of nature 
[see next §]. 

§ 9 Physiocracy 

Ad. Smith, bk. iv, ch. ix. Gamier, " Physiocrates," in Lalor. Blanqui, ch. xxxii. 
Cossa, pt. ii, ch. iv. Batbie, Turgoi. Condorcet, do. Tissoi, do. Cokn, 101-107. 

This, the next system,^ also French in origin, went to 
the opposite extreme from Mercantilism, making land 
the only source of income, and agriculture alone pro- 
ductive. The physiocrats maintained that : i Gold is 
never the end of trade, but only a means, ii A nation 
cannot in the long run sell more than it buys, and would 
not be benefited if it could, iii All governmental privi- 
leges and monopolies relating to business and com- 
merce are wrong, iv Trade, both domestic and foreign, 
should be free, state interference with business affairs 
reduced to a minimum.^ v The sole tax should be a 
direct one, upon land rent.^ These principles they con- 
nected with their doctrines of natural rights and a con- 
dition and law of nature,* which they expounded in a 
way to belittle the state and exhibit all conscious action 
of society as necessarily artificial. This theory is re- 
markable for its influence upon Adam Smith, and in 
hastening the French Revolution. 



INTRODUCTION 1 5 

1 We may speak of this one as having rallied a school to its support. 

2 The " laissezfaire" doctrine, which, with that of natural law, forms 
the heart of Physiocracy. The phrase was first used in an economic sense, 
though doubtless not with full physiocratic meaning, by a merchant in a 
conversation with Louis XIV. The formula laissez nous fair e was employed 
by Legendre, the geometrician, in i68o, disputing with Colbert. The 
phrase laissez faire was introduced to scientific literature in 1736, by the 
Marquis d'Argenson, finance minister to the Duke of Orleans, Regent of 
France after Louis XIV's death. Dr. Gournay was the earliest physiocrat 
to utter it, which he did with the addition, " et laissez passer." From him 
this language became the physiocrats' watchword [not, however, separating 
"faire" and "passer" as if they meant respectively "produce" and "ex- 
change"]. See on this, Pol. Sci. Quarterly, vol. ii, 706. 

3 At a good remove, however, from the thought of Henry George, i 
The physiocrats would tax improvements on land : George not. ii They 
expected revenue mainly from country sections and from fertility of soil : 
he has regard to unearned increment from the growth of cities, towns and 
villages, iii They taxed the product of labor, and because it was such : he 
sedulously exempts this. 

* " The state of nature was the reign of God." Pope, Essay on Man, 
Epistle iii, line 149. This essay is a great piece for the doctrine of a state 
of nature and for the ethics of the XVIIIth century. The thesis of Ep. 
iii is that the interest of one is the interest of all. Sir H. Maine, in his 
Ancient Law, traces the history of the " law of nature " conception. The 
distinction between man's condition under the minimum of society's influ- 
ence and that amid the play of fully developed social forces, is real and 
important. One may, for lack of nicer descriptives, name these, as the 
physiocrats did, respectively the state of nature and the state of culture. 
Only it is senseless to account the latter as of necessity depraved or per- 
verse. It, too, is in its way a state of nature. This admission should not, 
however, carry us to the counter error of praising all past acts or states of 
society as alike good simply because they have had place in history. Into 
this fallacy fall those [§ 7, n. 5] who attempt to justify Mercantilism. 

§ 10 Adam Smith 

htgram, 87 sqq. " Smith, Adam," in the Cyclopedias. Cossa, pt. ii, ch. v. Cohn, 
107-115. ^;/c^/e, H. of Civilization, vol. i, 152 sqq., 602 sqq. 

But Economics can hardly be said to have attained 
scientific rank till the publication, in 1776, of Adam 



l6 INTRODUCTION 

Smith's Inquiry into the Nature and Causes of the 
Wealth of Nations, — a truly epoch-making ^ work, far 
the most important single treatise ever devoted to the 
science. The material, so rich and large, which Turgot, 
Hume, and others had gathered and partially systema- 
tized, it at the same time utilized, purified, and arranged. 
Smith's central thought, instead of commerce on the 
one hand or agriculture on the other, is Industry, which 
he makes include both. In his system labor is the one 
source of value and ultimate determinant of prices. 
Productive labor, which is here, against the physiocrats, 
extended to include manufactures and commerce, though 
not * services,'^ as of teachers, physicians, savans, etc., 
is declared to be the real creator of wealth. Smith 
agrees with the physiocrats that, as a rule,^ industry 
ought to be unimpeded by governmental action, left to 
free competition under the benign spur of individual 
self-interest. Like them, too, he continually appeals to 
what is natural.* The exceeding merit of Smith's per- 
formance lay in his exhibition of the laws governing 
economic phenomena, and in his facile and copious 
presentation of historical proofs. His book also con- 
tains a number of discussions, masterly and never yet 
equalled, of certain weighty specific questions, as taxa- 
tion, the advantages of the division of labor, the causes 
of the diversity in wages, and the difference between 
money and other capital. His refutation of the bul- 
lion theory it would be as hard to improve as to 
impugn. 

1 How far Smith was a creator will be debated always. He raised few 
new problems, and the scope of his actually fresh insight was not large. 
But he saw in every direction somewhat that was new, and saw clearly 



INTRODUCTION 1/ 

what he saw, whether at first or at second hand. Withal he knew how to 
expound fehcitously, keeping up interest amid the dreariest details. His 
position as to Economics is much like Plato's touching philosophy. Each 
had numerous and great forerunners, yet succeeded in making himself for- 
ever the necessary point of departure for every intelligent student and 
writer in his line. Whole pages and chapters in the most recent treatises, 
however remote the writer's standpoint from that of Smith, read as but 
transcripts from the old master's book. 

2 He does not, in naming them unproductive, deny the usefulness of 
such services. They may be even indispensable. Productive is labor 
which creates wealth, and it is Smith's habit to restrict wealth to material 
entities. Useful abilities, however, he designates as capital, and hence, it 
would seem, must have thought them wealth as well. The two lines of 
representation appear inconsistent. 

3 He approved England's navigation policy [§ 6, n. 5], as a means not 
to national wealth, but to the naval power so necessary for England in 
facing other nations. Smith was far from going the physiocrats' length in 
denouncing all governmental touch of industry, 

* See preceding §, n. 4. 

§ II The Smithian School 

Ingram, 110-195. Brentano,Die klassische Oekonomie [1888]. Lunt, Pres. Cond. of 
Pol. Econ. Cohn, 115-123. Sidgwick, Principles, Int. Bagehot, Ec. Studies, iii. 

The influence of the Wealth of Nations upon eco- 
nomic thought was very great. Hundreds of keen minds 
turned to the new science ; minor points of its theory- 
were worked out ; its tenets began to shape legislation.^ 
Ricardo was the next noted general expositor in Eng- 
land, J. B. Say in France. Ricardo powerfully im- 
pressed James Mill, Senior, and J. S. Mill, through 
whose able presentations of the subject he silently be- 
came for all lands its accepted interpreter. Adam Smith 
was still praised much, but read less and less. His nar- 
rowness and errors were perpetuated, and his abstrac- 
tions, untempered by his regard for history and concrete 
fact, taken literally as universal truth. Dogmatism, apri- 



1 8 INTRODUCTION 

orism, and passion for crisp formulae prevailed. No 
side of man was studied but the economic, and this was 
assumed to have presented itself always and every- 
where as in England during the early XlXth century.^ 
Like defects marked the evolution in France,^ Italy, and 
America. Such an exhibition of Economics,* dry, eccen- 
tric and partial, rather than in the full sense false, con- 
tinued till yesterday the dominant one. Authors be- 
longing to this Orthodox School have, however, always 
differed among themselves not only upon lesser but 
upon fundamental doctrines. Such have been : i the 
degree and location of the scientific character attach- 
ing to Economics, ii the proper limits of laissez faire, 
iii the theory of Population, Malthus and his critics, 
iv that of Rent, Ricardo and his, v that of Wages, vi 
that of Money. 

1 As in England the Factory Laws and the abolition of protective duties. 

2 The misapprehensions, it will be seen, were mainly three, those of i) 
' perpetualism,' ignoring the change in human nature and society from age 
to age, ii) 'cosmopolitism,' ignoring the differences among various peo- 
ples at the same time, and iii) assuming an ' economic man,' when in fact 
no man's motives are ever solely economic. \Rumelin, Red. u. Aufsaeize, 
I, p. 13.] The first of these errors was the worst. 

3 Only here with more originality and variety. Bastiat [§ i, n. 7] was 
the ablest French writer after Say and had wide influence in France and 
outside. His, especially, is the doctrine of economic optimism, that the 
highest social weal is attained when each individual follows his own inter- 
est. English economic masters have never urged this. 

* One sees how far just and how far unjust it is to call all this ' Smith- 
ian.' ' Ricardian ' would be a stricter designation. German writers refer 
indiscriminately to the ' English School,' ' Manchester School,' ' Apriorists,' 
'Dogmatists,' ' CosmopoUtes,' as holding these notions. J. S. Mill had 
before his death, in 1873, emancipated himself at many points into a more 
truthful manner of viewing the science; and the other writers here re- 
viewed were by no means so absolutely out of the way as has often been 



INTRODUCTION I9 

represented. No critic has yet succeeded in judging between these and 
the newest writers with satisfactory impartiality and insight. Sidgwick, 
Principles, does best, 

§ 12 The Historical or Aposteriori Tendency 

Sidgwick, Principles, Int., iii. Ingram, ch. vi. James, Pref. to Ingram. Roscher, 
§ 26sqq.; Prelim. Essay, in Eng. Tr. CM«, 157-180. 5;«zVA [R. M.] and others, 
in " Science Economic Discussions." 

Inevitable reaction came, taking chiefly two shapes, 
a Socialistic and an Historical, the former attackins: 
more the laissez-faire doctrine, the latter the apriori 
character previously ascribed to the science. Hilde- 
brand,^ Knies, and Roscher ^ were the pioneers in the 
historical path, and their spirit and method have more 
or less affected nearly every economist in the world.^ 
Hence, (i) the greater insistence now on historical and 
statistical knowledge in interpreting and applying eco- 
nomic laws, and (ii) the inclination in many quarters to 
see in Economics nothing universal or of the nature 
of law, but only a phase of history,* a product of times, 
localities, and national peculiarities, requiring different 
maxims for different peoples. Man and society, it is 
urged, essentially alter with centuries and climes. Eco- 
nomic theory itself as well as economic practice is mat- 
ter of historical evolution, growing up in 'living con- 
nection with the entire organism of a period in the life 
of humanity and of peoples, with and out of the given 
conditions of time, space, and nationality, in fact con- 
sisting in these, and passing on with them to new devel- 
opments. Even the general laws of Political Economy 
are nothing but an historical explication, an advancing 
manifestation, of the truth, a mere generalization of the 
facts recognized up to any given point, and cannot as 



20 INTRODUCTION 

to either sum or formulation be declared unconditionally 
complete.' ^ 

1 Died in 1878. 

2 In the liistory of Economics and in economic history the most learned 
man living. He is commonly referred to as head of the historical school, 
but Knies is a far more radical opponent of the English method. 

« Cf. § 3, n. 9. 

* But by no means all aposteriorists go as far as this. Roscher himself 
does not, his exposition agreeing in the main rather with Adam Smith's. 
He decidedly alleges Economics to be a science, based on laws. So, 
indeed, does Knies, but he minimizes more than R. the resemblance of 
these [social] laws to those of physics. 

^ Knies, Pol. Oek., p. 24. This he opposes to the ' absolutism of theory ' 
which he charges upon the apriori economists. The quotation goes on : 
' The absolutism of theory, whenever it does happen to display validity at 
a certain stage, is simply a child of that time, and characterizes but a par- 
ticular period in the development of the science.' This is easily seen 
to be the development hypothesis of general philosophy applied to 
Economics. 

§ 13 Professorial Socialism 

Cossa, Guide, 196. Laveleye, Socialism of To-day, ch. xii. Rae, Contemp. Socialism, 
ch. V. Ely, French and German Socialism, ch. xv. Held, Grundriss fur Vorle- 
sungen, 25 sqq. Sch-inoller, Ueber einige Grundfragen, etc., 31-50, also 93 sqq. 
Meyer, Netiere Nationalokonomie, 227 sqq. 

This expression names a bold and popular phase 
which, since 1872, economic theorizing has assumed 
especially among professors of Economics, and in Ger- 
many. In that land this is now the ruling school, and 
an increasing number of the foremost English and 
American economists are its adherents. The professo- 
rial socialists,! like the aposteriorists, have little faith in 
any natural or universally valid laws of Economics, and 
insist on the relativity of its doctrines to time, place, 
and history. They indeed differ from writers like Ros- 
cher,2 less in virtue of any strict principle than through 



INTRODUCTION 21 

peculiar emphasis upon certain points, i They make 
' wealth ' distinctly subordinate to * man * as the central 
economic conception, refusing to sunder Economics 
sharply from sociology in general.^ ii They assert a 
vital relation between ethics and Economics, insisting 
that human nature is essentially altruistic, and that, so 
far from self-interest, in whatever sense,* being the sole 
economic motive, wealth is always in large part a product 
of moral and religious factors, iii They ardently op- 
pose laissez faire as presumptive maxim,^ and deny 
Bastiat's contention that harmony of interests must 
accompany free competition. iv Believing that eco- 
nomic law is very much the creature of legislation, 
they freely recommend governmental intervention to 
assuage inequalities of fortune^ and social ills of nearly 
all sorts. V They rebuke the inclination of the older 
economists to identify Economics with the mere pro- 
duction of wealth, and urge attention to questions of 
distribution as even more important. 

^ This name, Kathedersocialisten, or socialists of the [teacher's] chair, 
was first applied in derision, to ridicule the alleged proposal of the new 
theorists to settle the social question ' by university lectures.' The move- 
ment originated in Schaeffle's Capitalismus u. Socialismus, 1870, Wagner's 
Jiede tieber die Sociale Frage, 1 87 1, and Schoenberg's treatise entitled 
Arbeitsaernter. October 6 and 7, 1872, a convention was held at Eisenach, 
and the next year the Verein fur Socialpolitik formed in the interest of 
the new views. Besides the three writers named, Brentano, Held, Nasse, 
SchmoUer, and von Scheel, have been prominent as socialists of the 
chair. The men who share this tendency, by no means agree in details 
or even in all the doctrines which themselves consider important. See 
next note. 

2 Some of them, as Schmoller and his pupils, go very much farther 
than Roscher in denying to Economics the character of a science. A few 
practically reduce it to the mere empirical knowledge of trade and industry 



22 INTRODUCTION 

[Descriptive Economics]. Cf. Wagner, in Quar. Jour. Econ., vol. i, 113 
sqq., and Nasse, ibid., 503 sqq. 

^ There is a cluster of subjects, e.g., the prevention of vice, the manage- 
ment of criminals, sanitation, divorce, charity, no one of which perhaps is 
yet worthy to be regarded a science by itself, and which it is customary to 
group together as departments of the general science of sociology. The 
latter title is also used generically, as including several branches of knowl- 
edge recognized as sciences, law, politics, and ethics among them. It is 
the habit to rank Economics with these last : professorial socialists incline 
to place it rather in the less differentiated class. They mock at the assump- 
tion of an " economic man," and see danger in attempting to separate its 
economic elements from the rest of human nature even for analysis and 
study. Schmoller makes a point of distinguishing between a natural 
order in the economic life [such as § 15, n. 4, refers to], the reality of which 
he fully admits, and a moral, social, or psychological order, race-customs, 
the spirit of times, etc.; and he complains that the Smithians ignore this 
realm. He expects economic reform to come largely from the building up 
of new customs and social ideas, more favorable to the laboring classes, 
which shall, when necessary, though by no means all of them, congeal into 
laws. 

^ I.e., whether as downright selfishness or as a self-regard in accord 
with general warfaire. Adam Smith's most famous followers were wont 
considerably to overlook or belittle man's natural regard for his kind, and 
their representations need correction [§ 15, n. i]. Their meaning on the 
point has, however, been in part misunderstood. Often what they affirm is 
not so much man's selfishness, whether in a worse or in a better sense, as it 
is his individualism, his dependence for greatest efficiency in action, upon 
his own rather than upon society's initiative. 

° See § 15. 

^ Here socialists of the chair approach pure socialism [next §]. Wag- 
ner goes so far in this direction as to favor the public ownership of land in 
cities, and the use of taxation as a means of equalizing wealth. Schmoller 
\_Einige Grwtdfragen, 97] quotes with delight an expression of Frederic 
the Great, to the effect that taxes have among other ends that in particular 
" of establishing a sort of equilibrium between rich and poor." 



INTRODUCTION j23 



§ 14 The Socialists Proper 

Schaeffle, Qiiiniessenz d. Socialismus. Laveleye, Rae, and Ely, the works men- 
tioned at § 13. Kirkitfi, Inquiry into Socialism. Os^od, Pol. Sci. Quar., vol. i, 
564 sqq. Marx, Capital. Adler, Rodbertiis ; also his Gritndlagen d. Marx^schen 
Kritik. Kozak, Rodbertus-Jagetzow's A?iszcktcn. Dietzel, Karl Roubertus. 
Cohn, 133-I57- Dawson, Gertnan Socialism and Lassalle. 

These are the most pronounced foes of Adam Smith's 
system, set especially against the principles of private 
property and free competition in work and trade, re- 
garding them the roots of all social misery. Scientific 
socialism pleads for an economic regime wherein all 
land and material capital ^ shall be public instead of 
private property, the state, not the individual capitalist, 
being the employer of laborers, and production and the 
distribution of products not left as now, subject to specu- 
lation and to the law of supply and demand, but regulated 
justly and by authority, according to the wants of the 
whole body of consumers, so that no one need be idle, 
uncared for, ignorant or poor. Saint-Simon, Fourier and 
Owen 2 had each developed a kind of socialistic scheme, 
but Louis Blanc was the first ^ to expound socialism as a 
thorough-going new political order. Proudhon, his con- 
temporary, advanced the thesis that property is theft, 
though he subsequently retracted this. But no strong 
scientific grounds for socialism were presented till Rod- 
bertus and Karl Marx, two able German thinkers, whose 
reasoning has commanded the attention of the economic 
world. From one of their favorite premises, Adam 
Smith's doctrine of labor as the sole source of wealth, 
they argue that the laboring class deserves far more than 
it gets; while from another, viz., Ricardo's * iron law' 
of wages, they conclude that such injustice must iuevi- 



24 INTRODUCTION 

tably continue^ so long as the means of production 
remain in private hands.* 



' Socialists must be distinguished from anarchists, who believe that 
government, as contrasted with administration, can and should be abolished, 
and from communists, who wish possession and enjoyment in common, as 
well as production. In opposition to the anarchist, the socialist proposes 
to continue some form of real political authority ; contrary to the commu- 
nist, he does not expect or desire complete levelling in social place or eco- 
nomic condition. Henry George is not a socialist. He indeed proposes 
state ownership of land, but his entire conception of the social body and its 
mode of true growth is Smithian, at the farthest possible remove from that 
of socialists. 

2 Saint-Simon, 1 760-1825, wished society reorganized into a grand co- 
operative commonwealth, under the masters of industrial science and admin- 
istration as governors; but he gave only the vaguest hints how to accomplish 
this. Late in life he gathered a few brilliant enthusiasts into a school. 
This survived him, but perished in 1832. Fourier, 1 772-1837, and Owen, 
1 771-1858, both devised schemes of cooperating communities, numbering 
from a few hundred to a few thousand members apiece, each occupying a 
huge barrack [or ' phalanstery,' to use Fourier's word], and carrying on 
all the necessary industries with the fullest aid of cooperation and improved 
machinery. Owen wanted products enjoyed in common; Fourier did not 
wish to abolish private property, but planned, after assuring a minimum to 
the least productive workers, to assign j^j of the rest to labor, -^^ to capital, 
and y\ to talent. Owen and Fourier, like the anarchists of to-day, hoped 
that all humanity would adopt this organization. Fourier started a pha- 
lanstery, which utterly broke down. Owen began several — one of them 
at Harmony, Indiana — with no better success. The chief result of these 
ideas was great stimulus to cooperation, of which system Fourier and Owen 
may be styled the founders. 

3 Blanc, 1811-1882, urged that the state should open workshops for the 
unemployed, expecting these to succeed so well as to raise the level of 
wages and gradually come to monopolize industry. Blanc put forth his 
first great work, U Organization du Travail, in 1840, and Proudhon, 
1809-1865, uttered his famous words, la propriete c'est le "vol, in the same 
year. This thought was not original with Proudhon, but had been 
advanced long before by Brissot de Warville, the Girondist leader in 
the French Revolution. Proudhon was however the first to proclaim the 



INTRODUCTION 2$ 

feasibility of just distribution by means of " labor-time " wages and prices, 
ideas which Marx borrowed from him. 

* Marx, 1818-1883: Rodbertus, 1805-1875. Partly their premises, 
taken from Smith and Ricardo, are unsound; partly they reason from 
them illogically. Full discussion falls under Distribution, but see §§ 15, 37. 
Ricardo's ' iron law,' as interpreted by the socialists, is to the effect that 
by the present economic order all wages necessarily tend to the starvation 
level. 

§ 15 Our View. 

Newcoinb, Princeton Rev., Nov., 1884. Molinari, Les Lois naturelles de Vecon.pol. 
Sidgwick, Principles. Lunt, as at § 11. 

The Historical School merits thanks for insisting 
on what, though well known, is rarely felt in proper 
force, that Economics, when applied, becomes a mere 
science of tendencies, and that no one of its specific 
laws can safely be pronounced operative in any concrete 
case without fullest study of local and temporal condi- 
tions. It has refuted the old notions of human nature 
and social institutions as fixed creations, and shown 
society to be an organism, subject to evolution^ no 
less than are the other realms of biology ; thus inci- 
dentally revealing, further, how meagre must be a sys- 
tem of economic truths valid for all ages and peoples. 
To the Socialists, whether partial or complete, be it 
granted that (a) laisses faire"^ is no absolute principle, 
(b) its application has nowhere brought social mil- 
lennium,^ (c) existence of thorough natural harmony 
in interests between different social classes is not 
proved,* (d) government can do much for the better- 
ment of economic conditions without attacking the 
property right or becoming dangerously paternal, (e) 
within these limits it should labor in this direction to 



26 INTRODUCTION 

the utmost, (f) with increase of morality and intelli- 
gence, its sphere may in this respect possibly be en- 
larged. Yet we maintain that : i Certain general laws of 
absolute and universal validity and no less * natural ' 
than those of physics, underlie the science of Eco- 
nomics, viz., those laws of the physical world and of 
man's constitution w^hich determine man's temporal 
weal.^ ii In all economic activity the presumption 
is in favor of individual liberty and free competition 
[laissez faire], rightfulness of public intervention in 
no case admissible save after proof.^ 

1 Society an organism (i), subject to evolution (ii) — these are the 
main insights for which we are indebted to the aposteriorists. The nomi- 
nalistic, individualistic idea of society, making it a mere chance aggrega- 
tion of individuals, must be surrendered. Society as such and by itself 
has aims, tendencies, a life entire, which are more than generalizations 
from the experiences of John, Richard, and Peter. With this better view 
of man as member of a social cosmos has naturally come a sounder 
ethics. Self-regard is seen not to be the whole duty of a moral agent 
[§ 13, n. 4]. Neither is the self-seeking of A, B, and C that sure way 
to the general good which Bastiat thought it [§ 13, iii], except in the 
sense that one best serves self by devotion to others. The second truth, 
social evolution, must also be recognized. Human nature, unless the 
notion be made ridiculously meagre, is not the same in different genera- 
tions but changes from age to age. On the whole matter of this note, cf. 
Ward, Dynamic Sociology. 

2 This maxim, never authoritatively defined, has been used with great 
latitude of meaning. See Gamier, " Laissez Faire," in Lalor. English 
writers have meant less by it than French. Sidgwick, Principles, 22. 
As usually applied it has signified that government should restrict its 
agency to the protection of men in their " natural rights," to life, liberty, 
and property. But no government has ever yet been able to proceed upon 
so narrow lines. Nor ought governments to attempt this. If legislation is 
often a hindrance economically, it may be also a great, even an indispen- 
sable help. Its work in gathering statistics is invaluable. So are its coast 
and other surveys and its meteorological reports. Forests, fisheries, and 



INTRODUCTION 2/ 

ocean and river dikes, to cite a few obvious cases, government alone can 
supervise in accord with the economic interest of all. For other benefits 
from the state's positive intervention, see Shaw-Lefevre, opening Addr. 
bef. the British Social Science Cong., Birmingham, Sept. 17, 1S84 [in 
ans. to H. Spencer's Man and the State]. Cf. Mill, bk. v, ch. i, and 
Schmoller, Grundfragen, 95. 

^ In England, e.g., where industrial freedom is most complete, but 
poverty still dire and stubborn. 

* More nearly is it disproved. The immediate interests of different 
men and classes certainly clash continually. The permanent good of indi- 
vidual or class is surer to accord with that of society; though it by no 
means always does so, unless a higher than economic good is meant, or 
" permanent " taken as reaching beyond time. Thus, riches are acquired 
in the liquor trade, in gambling, and by selling obscene literature and pic- 
tures — businesses which curse humanity [§§ i8, n. 5, 21, n. 7]. 

* See Cohn, 69-78, and Senior, Pol. Econ., 26-81. That men must 
eat to live, and work in order to eat, that they prefer pleasure to pain, 
and seek to attain their ends [whether selfish or unselfish] by the least 
onerous processes, are specimens of such laws. The tendency of popula- 
tion to outrun subsistence [Malthusianism] is another. De Molinari's law 
that the price of a commodity falls or rises in a geometrical ratio as 
its amount increases or diminishes in an arithmetical, may be cited as still 
another example, valid universally so soon as exchange begins, though in 
a less definite way than his presentation would imply. We name, too, the 
law by which the precious metals distribute themselves. If they are pecu- 
liarly plenty high prices [of other things] prevail and the money flows off 
to effect purchases at remote centres. If they are scarce the counter phe- 
nomena have place. The law of diminishing returns, however checked 
here and there, is as universal as the industries, agriculture and mining, to 
which it relates. Knies's scruple [Pol. Oek., 356], to call some of these 
* natural ' laws, on the ground that they do not relate to " things corporeal 
and subject to sense-perception " seems fanciful. Whatever objection may 
lie against regarding as * natural ' the purposive movements of society, the 
unconscious play of psychical and social forces may assuredly be so styled. 
The idea of a world's text-book on Economics is therefore not absurd, 
though the principles which such a work could lay down would be few 
and general. Cairnes, Logical Meth., i. 

^ Sidgwick, Principles, p. 22; Mill, bk. v, ch. xi, 7; Schmoller, Grund- 
fragen, 47. Notice that the maxim is not announced as certainly valid for 
all past or possible states of society. 



28 INTRODUCTION 



§ 1 6 Value of the Study 

Latighlzn, The Study of P. E. Cumming, Value of P. E. to Mankind, Cobden Club 
Prize Ess. for 1880. Rose her. Prelim. Ess. to English Tr. Cossa, 23. Buckle, 
Hist, of Civilization in Eng., vol. i, 150 sqq. Tennemann, Gesch. d. Philos., I, 30. 

In fitness for place in an educational curriculum/ 
Economics perhaps surpasses all other studies, through 
the remarkable combination which it involves of mental 
discipline with practical utility .^ Each of its proposi- 
tions requires careful thought, while certain of its rea- 
sonings challenge the highest powers of mind.^ On the 
other hand, though it is a science, not an art,^ its truths 
touch every human life. Among a great deal else of 
obvious importance which acquaintance with Economics 
incidentally makes clear, may be mentioned : (i) the fal- 
lacy of many prevalent notions about wealth,^ (ii) the 
failure and even positive cruelty of much intended 
charity,^ (iii) the sure and widespread effects of waste,'^ 
(iv) the inevitable interdependence of individuals, 
classes, and nations, and (v) striking evidence of in- 
telligence and beneficent law as reigning in the uni- 
verse. A time comes in the history of every cultivated 
people, when social comfort, to say nothing of social 
progress, depends absolutely upon knowledge of eco- 
nomic principles. Europe is at this point already ; we 
shall soon be. 

^ Whether more liberal ox more practical. It is perverse to limit science 
to exact science [§ 4, n. i]. Equally so to suppose the best education 
attainable by drill in the exact sciences alone. That is important but often 
carried relatively too far. Not only do action, conduct, life, all lie in the 
domain of inexact science, making training in this indispensable to every 
educated person, but even looking from the point of view of an exclusively 
liberal education, it is a higher attainment, a finer feat of mind, to be 
expert in the inexact than in the exact sciences. 



INTRODUCTION 29 

^ The advantage of this, considering the study as a branch of hberal 
culture, lies in the zest it imparts. It is a help, too, that the pupil is sure 
to possess beforehand a certain familiarity with the subjects to be consid- 
ered. This, however, in spite of the best instruction, sometimes breeds 
slovenly analysis and looseness of view. A kindred difficulty arises from 
the use in Economics of many ordinary words in a technical sense. Stu- 
dents suppose themselves thinking the correct thought because they 
attach a more or less definite meaning to the word. From the same cause 
is also most of the economic sciolism so common among persons not stu- 
dents at all, who yet discuss rent, profits, wages and whatever other topic 
is named by a familiar title, with all the assurance of an Adam Smith. 

^ As those upon money and foreign exchange. Not here alone but 
throughout the science the data have a peculiar mutual relativity which 
renders them elusive. The nod cttw is for many an argument difficult to 
fix. Premises can often be made definite only by a piece of abstraction 
which the course of reasoning shows to have been incorrect. We have 
then to amend them and rethink our work with scrutiny to see whether, 
and if so where and how far, the change has vitiated it. No other sort of 
exercise will test and develop the mind like this. 

* As Adam Smith, in the main, conceived it. We investigate its facts not 
primarily to use them, but to know them. Yet their character lends a 
special interest to the work. Here at least it is not true, if it is or ever 
has been anywhere, that science cares, in the strictest sense, only for truth, 
regardless of truth's worth in life. 

^ In reference to its nature [§ i, n. 3], and its importance to happiness 
and civilization. How many consider wars, fires, and floods as blessings 
because they ' make work.' Cf. n. 7, below. Read Bastiat's bright essay 
\_CEuvres, vol. v, 336 sqq.] on That which is Seen and that which is Unseen. 
A writer in the Pop. Sci. Monthly for 1885, estimated the loss by fire in 
United States during 1884, at $160,000,000. 

^ Mill, bk. ii, chaps, xii, xiii. By misplaced alms, not only is wealth 
wasted which might have supported honest productive labor, whose product 
might in turn have gone to support labor in further production still, and so 
on indefinitely; but a vicious, lazy habit is engendered in the object. 

"^ Could we prevent the waste from uneconomic housekeeping alone, 
the fund resulting would far more than suffice to feed all the hungry. 
" Whoever can teach the masses of the people how to get five cents' worth 
a day more comfort or force out of the food which each one consumes, 
will add to their productive power what would equal a thousand million 
dollars a year." See § 49. 



30 introduction 

§ 17 The Division of Economics 

Cossa, pt. i, ch. ii. Gamier, Traite, 18-20. 

Our science is most commonly presented under the 
four general heads of Production, Exchange, Distribu- 
tion, and Consumption.^ This arrangement is illogical, 
since all Exchange and an important part of Consump- 
tion are branches of Production. As, however, Produc- 
tion, exhibited so in its strict integrity, forms a most 
bulky topic, overshadowing the others and giving to the 
parts of the discussion a very unequal size, we may con- 
sult convenience along with logic, and lay out our 
matter as follows : Part I, Production, except as involv- 
ing Exchange, Part II, Exchange, except as involving 
Money. Part III, Money. Part IV, Distribution. 
Part V, Consumption. Part VI, Practical Topics 
touching upon Economic Theory. 

^ So Wayland, F. A. Walker, Mangoldt and Garnier, exactly, also most 
other French writers [Leroy-Beaulieu, Levasseur], only placing Distribution 
before Exchange \_circulation'\. Roscher, too, has the order given in the 
text, save that he injects after Production as coordinate with the other 
four, a Part [ii] on Freedom and Property. Chapin's Wayland strangely 
alters the order to Production, Consumption, Distribution, and Exchange. 
M'Culloch, Principles of Pol. Econ., is exactly logical : Production, Distri- 
bution, Consumption. Mill and Fawcett both say Production, Distribution, 
Exchange. Laughlin and H. C. Adams have these same topics, but reverse 
the order of the last two. Senior divides into the Nature, Production and 
Distribution of Wealth. Cherbuliez has Production, Circulation, Distribu- 
tion, treating Consumption as sub-topic of Production. Except in the last 
point Held agrees with him \_Produciion, Verkehr, Vertheilung\. Quite 
original is Cohn's marshalling, into the Elements, the Form-iaking \_Gestal- 
tung], and the Processes, of the Economic Life. With a similar motive, to 
emphasize the dynamic aspect of the science, F. H. Giddings suggests 
treating it under the rubrics of Descriptive Economics, and Economic 
Physics, Politics, Biology, Psychology, and Evolution. The purpose is a 
good one, but can, we believe, be carried out as logically, and, for the pur- 
poses of a treatise like the present, more profitably, by handling the mate- 
rial as the text proposes. 



Part I 



PRODUCTION 

EXCEPT AS INVOLVING EXCHANGE 

CHAPTER I 
the nature of production 

§ 1 8 Various Views of Productivity 

Roscher, §§ 48-52. Mill, bk. i, ch. iii, § 3 ; Essay iii on Unsettled Questions. Gamier, 
Traite, ch. ii. Ad. Smith, bk. ii, ch. iii. 

The mercantilists regarded industry productive only 
in proportion as it tended to swell the nation's stock of 
money. They deemed manufactures more productive 
than agriculture, their finer forms more than the coarser, 
active^ and direct commerce more than passive and indi- 
rect. The physiocrats identified productive toil with 
the extraction of useful raw material, stigmatizing 
other occupations^ as * sterile,' because sustained only by 
overplus gained through work upon the land. Adam 
Smith and Mill styled unproductive all exertion, how- 
ever useful, not taking form in some useful material 
object, placing in the unproductive list in fact more call- 
ings ^ than their own definition required. Their classifi- 
cation has been followed by most writers of the English 
School. Not by the French,* who, even when disciples 



32 THE NATURE OF PRODUCTION 

of Adam Smith, have usually reckoned as productive all 
labor imparting economic modifications to the immate- 
rial nature of man. Roscher goes further still, and de- 
fines every sort of activity as productive which society 
is willing to pay for.^ This is now the prevalent 
doctrine. 

1 Cf. § 7. "Active" commerce = preponderance of export = favorable? 
balance of trade: " passive "= preponderance of import = unfavorabtfe 
balance of trade [Roscher, § 48]. 

2 Cf. § 9. They believed manufacturing to do nothing but change the 
form of things, whatever value it added being just the sum of the raw ma- 
terials consumed by the laborers in the process of manufacture. Quesnay 
indeed saw that not all the new worth added by manufacturing could be so ex- 
plained, but considered the rest the outcome of natural or legal monopoly. 
Trade too the physiocrats thought " sterile," merely passing wealth from 
one hand into the other. What merchants won was at cost of the nation. 
On all this, and the easy refutation of it, Roscher, § 49, and n. 2. These 
men supposed, as did so clear a head as Locke, that what one party to 
a trade gained the other must lose — a perfectly patent error [§ 20, n. 4]. 
Boisguillebert made clear the productiveness of exchange, by supposing 
three men bound to stakes one hundred paces apart, the first with a stock 
of victuals but naked, the second with a huge pile of fuel but no food, the 
third with a superfluity of clothing but no supply besides. Could they ex- 
change, all three would be happy: as they cannot, all die. 

2 Not only the frivolous occupations of opera-singers and ballet-dancers, 
but the important ones of statesmen, judges, clergy, physicians, army and 
navy. I.e., violin-making productive, but violin-playing not, though the 
sole end in making the violin is that it may be played [Garnier] ! Train- 
ing of swine unproductive, educating men unproductive [List] ! The 
churl who scares crows from cornfields productive, soldiers who bar out in- 
vading armies unproductive [M'Culloch] ! Roscher, who cites the objec- 
tions just given, notes that the Smithians have to own certain industries as 
productive though affecting material objects only indirectly, and that govern- 
ment officers, physicians and the like, certainly contribute at least indirectly 
to much material production. 

* J. B. Say, Dunoyer, Garnier, Sismondi. The last speaks of govern- 
ment and army as "guardians, v^^o produce security" [Garnier, p. 34]. 
Bastiat went so far as in effect to make all production immaterial, calling 



THE NATURE OF PRODUCTION 33 

commodities a form of services. J. B. Clark [Philos. of Wealth, ch. i] 
precisely reverses this, interpreting the essence of a service to be always of 
a material nature. The wealth which the orator produces in speaking, or 
the prima donna in singing, consists in the exhaled air vibrating so and so, 
etc. 

* See his § 52. " Every business whose service is rationally sought for 
and duly paid for." By inserting " rationally " he would hint at the mal- 
productiveness of lucrative trades which curse mankind. In 1853 there 
were said to be in France 3500 colporteurs of immoral literature and pic- 
tures, selling yearly nine million copies and getting for them six million 
francs [^1,200,000]. Such businesses are formally rather than really pro- 
ductive. "No rational lahoT is unproductive" [Gamier]. "The union 
of the word lador with the word unproductive is nonsense " [Rossi] . " The 
only labor that is really unproductive is that which fails to attain its pur- 
pose" [H, C. Adams]. 

§ 19 Wealth-Increment which is not Production 

Mangoldt, Grmidriss d. Volksivirischaftslehre , §§ 12-15. 

While the classes of entities making up wealth come 
by man's deliberate exertion, certain contributions to 
wealth are free.^ Such may spring from : i Changes in 
the objects of wealth, as gratuitous abundance at har- 
vest owing to propitious weather, or advance in landed 
or other wealth by the natural growth of a commu- 
nity.2 ii Changes in the subjects^ of wealth, as the 
increase of their needs in compass, kind or intensity, 
larger knowledge of the means for supplying them, or 
fuller power to utilize these means, iii Changes of re- 
lation between the subjects and the objects of wealth, 
as by better laws or government,* or progress of the 
community in morality. 

^ § I, n. 2. This truth socialists ignore, a defect which vitiates Marx's 
" Capital " almost entirely. While wealth, speaking generally, originates 
in labor, the amount of wealth in a thing is usually a very inexact measure 
of the labor bestowed on it. 



34 THE NATURE OF PRODUCTION 

2 The two cases are unlike. When a generous rain adds a million bushels 
to the wheat-i'ield for the year, no part of the gain is due to human agency. 
Rise in the amount of wealth embodied in its land and buildings by the 
growth of a city is a result of what men have done, yet one not consciously 
purposed. It therefore does not fall under our definition of wealth [§ i]. 
In speaking of land value here we make no reference to the original prop- 
erties of land, or to mere place, both of course gratuities and therefore 
conditions of wealth rather than wealth; but to improvements upon land. 
Obviously unearned increment may attach to these as well as to the un- 
created, primordial qualities. It is natural to call the increment in the one 
case wealth, since it is an addition to wealth, and in the other for an anal- 
ogous reason, condition of wealth. 

3 See Mangoldt, § 14. Human beings are of course meant. With ad- 
vance of culture man experiences ever new need and comes upon ever 
new objects for its satisfaction, — both, in numberless cases, as in many 
inventions and discoveries, accidentally, without any purposive action of his 
own. The benign outcome of such new knowledge has sometimes very wide 
sweep. The discovery of spinning and weaving must have greatly enhanced 
the value of sheep, wool, and all fibre-producing plants. As acquaintance 
with the earth and its products increases, insight into the useful properties 
of things and into ways for using them becomes increasingly a matter of 
study, so that discoveries occur more from purpose. Then the search, if 
successful, is genuine production. 

* Making ownership a surer thing. But so far as the betterment in law 
or administration proceeds from economic motive, more and more the case 
as governments grow better, the generation of new value thereby is out 
and out production. 

§ 20 Production 

Mongredien, Wealth-Creation. Roscher, § 30. Mangoldt, as at § 18. Mill, bk. i, ch. i. 

Production consists not in the creation of new 
material, a deed beyond finite power, but in the origi- 
nation by conscious human 2S±} of wealth or of direct 
gratifications such as commonly proceed from wealth. 
We originate wealth by so shaping, combining or 
placing given elements or forces of the universe or of 
man's nature as to bring forth, impart or increase util- 



THE NATURE OF PRODUCTION 35 

ity. Immaterial wealth is produced by the develop- 
ment or training of intellectual power, skill, sleight, or 
habit, or by putting human beings into new relations ^ 
one to another. Material wealth is produced, (i) by 
* occupying- ' 2 spontaneous natural elements or prod- 
ucts, (ii) by extracting minerals from the earth, (iii) by 
growing vegetable or animal products through use of 
nature's forces, (iv) by transporting things from place 
to place, (v) by changing their mechanical or chemical 
forms,^ or (vi) by exchanging them between different 
owners.* All prevention of decrease or destruction, in 
wealth may be called negative production.^ 

1 See § I, and its n. 3. "Relations" here means not only those re- 
ferred to by this word in § I, but also the " influences " had in mind there; 
these last too being relations, though of a peculiar kind. On relations as 
wealth, see the art. " Copyright," in Lalor. 

2 Appropriating, that is. For this nice sense of occupare see § 3, n. 3. 
Hunting, trapping, gathering wild fruits, and the like, taking water gratis 
from springs or streams and purveying it to people in towns at a price, 
would illustrate. 

3 Mechanical, cloth-making; chemical, soap-making. The pupil can 
multiply examples. 

* One man owns a dray-horse but needs a roadster; another needs a 
dray-horse but owns a roadster. They exchange and both are richer. So 
is the world. This and the case of production by transportation excellently 
bring out the essential idea. Roscher refers to the ice trade between Boston 
and the W. Indies. So early as 1843 5S>ooo tons were sent. Uncut it cost 
25 cents a ton, packed in the ship, ^2.55, and brought at destination over 
$65 a ton, an advance of more than ^3,561,250, — almost entirely due to 
transportation alone. Carloads upon carloads of hides go from N. Y. city 
to Chattanooga to be tanned and returned as leather. In the latter case 
travel is not the cause of the added value but the condition, it being neces- 
sary in order to utilize the excellent tanning properties of the chestnut burr 
oak of Tennessee [Atkinson]. 

* No inconsiderable part of the work of clerg)', judges, army and police. 
Legitimate speculation falls here [§ 21, n. 7. Cf. Mangoldt, § 37]. Pro- 



36 THE NATURE OF PRODUCTION 

duction is not negative simply because [like washing clothes] it begets no 
new thing or form, or because it simply does away with obstacles. In this 
last, strictly, all production consists [Cannan, Elementary P, E., 7, 8]. 



§ 21 Special Remarks on Production 

Roscker, § 50. Gamier, ch. ii. Cannan, Elementary P. E., pp. 9 sq. Clark, Philos. 
of V/ealth, ch. i. Mangoldt, § 26. 

i The dignity of production is not determined by 
either the duration,^ or the dispensableness ^ of the prod- 
uct, but by its total and final effect upon the nature of 
man.^ ii The real product in activities like oratory, 
music, and teaching is either a temporary gratification 
or a more or less permanent addition to immaterial 
wealth,^ the tones and words being instrumental only, 
iii * Directly and indirectly productive' is a purely 
relative distinction, as every productive process has the 
one or the other phase according to your point of view. 
The policeman produces security directly, the hatter 
hats ; while each's work indirectly helps into existence 
the other's product. So in all cases.^ iv Distinguish 
i) technical or formal production, which neither in- 
creases nor diminishes wealth whether general or pri- 
vate,^ 2) production which adds to private wealtli only 
and perhaps detracts from general,''' and 3) that which at 
first and visibly swells general wealth alone, advancing 
individuals' possessions merely in the ways all public 
benefits^ do. v Inasmuch as national and cosmic wealth, 
like private and general, are partially susceptible of an- 
tagonism, 'we should denominate as absolutely pro- 
ductive only such industries as promote the wealth of 
mankind.' ^ vi There can be no such thing as general 
overproduction, viz., an all-round glut of products, be- 



THE NATURE OF PRODUCTION 37 

cause the desires of men, intrinsically satisfiable eco- 
nomically, are unlimited in number, indefinite in degree, 
and forever increasing.^*^ 

1 Bread may last two days, lace two centuries, yet bread-making is, if 
we distinguish at all, the higher service. Roscher observes that labor 
upon persons and relations, though in compass and duration less mensur- 
able than other, is apt to rank highest in power to multiply and propagate 
itself. 

2 We could get along without music or works of art better than without 
cloth, but real civilization demands both. Roscher justly rebukes the 
habit of regarding any general department of industry more honorable than 
another on this score. Agriculture gives us tobacco, from manufacture 
come playing-cards, from commerce rum, while " among services belong the 
indispensable ones of educator and judge, as well as the dispensable ones of 
rope-dancer and bear-exhibitor." Cf. Knies, Dietistleistungen d. Seldaten. 

^ Often to be ascertained only by extra-economic inquiry, in esthetics 
and ethics. 

* In agreement with Garnier and Dunoyer, and against J. B. Say, who con- 
sidered [in case of a teacher] the lecture the product. For Clark's notion, 
see § i8, n. 4. He will not term any property of man economic product 
[wealth], lest we confound wealth-creating abilities with the product re- 
sulting from the exercise of them. But no confusion need arise by naming 
both wealth, any more than by applying this term to a machine, which is 
at once wealth and wealth-producer [capital]. Exactly how we define 
here is hovi'ever not a vital point. 

'^ Thus a wagon is now used for pleasure, again to transport goods, and 
» meadow serves partly for beauty, partly to grow grass. 

8 Making things which do no one any good. 

"^ Like the business specified at § 18, n. 5. Cf. above, n. 3. To this 
add the general manufacture and sale of liquors, very profitable trades to 
most engaged in them, 99 per cent of whose effect, however, is a palpa- 
ble impoverishment to the community, i) withdrawing capital and labor 
from admittedly productive channels, ii) diminishing men's productiveness, 
partly day by day, partly by shortening life, iii) vastly increasing public 
expenses by multiplying paupers and criminals, iv) breaking down char- 
acters and swelling the misery of human life. This is not denouncing the 
existence of intoxicants or declaring the use of them never justifiable. 
Gambling at best ministers only to private wealth. Every cent which A 
gains, comes from B or C. Worse than this, the habit breeds a temper 



38 THE NATURE OF PRODUCTION 

most deleterious to thrift and industry. Gambling in stocks, wheat, cotton, 
etc., is precisely as condemnable economically as faro or bluff. Not so 
speculation with genuine intention to transfer the goods. This tends to 
steady prices and hence is negatively productive [§ 20, end]. Betting on 
futures, which a vast amount of speculation in the various exchanges essen- 
tially is, does not have this tendency but just the reverse. 

^ Many, not to say most, new railroads have caused loss to their first 
owners; few if any of them have failed to benefit their localities. Good 
public works require taxes, but more than repay these, being a blessing to 
every citizen, whether enhancing the selling value of estates [the usual 
result] or not. 

^ Roscher. A nation may enrich itself at the expense of the world, as 
I at the cost of my neighborhood. This not necessarily by arms, nor even 
by its own act at all. Great Britain has for years had cheap sugar partly 
as a gift at the cost of the continental states, through the operation of their 
sugar bounties. Cf. § 36, n. 7. 

1'' George, Soc. Problems, 90, 164 sqq. Cannan, § i. Perry, 126 sqq. 
Mill, bk. i, ch. v, § 3: "The limit of wealth is never deficiency of con- 
sumers, but of producers and productive power." This truth is against 
writers like Malthus, Chalmers, and Sismondi, who have alleged unpro- 
ductive consumption to be a good, without which wealth would accumulate 
beyond needs and run to waste. Crocker, in Quar. Jour. Econ., vol. i, 362 
sqq., essays to show the same. He of course fails, not seeing that to prove 
actual over-production in many departments — which is easy — is far from 
proving general over-production. 

§ 22 The Conditions of Production 

Gamier, ch. ii, IV. Roscher, bk. i. Mangoldt, bk. ii, ch. ii. Mill, bk. i. ch. i. 

These may be grouped in three classes, as follows : i 
The absolute, without which no production whatever 
could occur. They are Nature and Labor, and their 
formula, sine, non. ii The relatively absolute, in whose 
absence production, possible indeed to a very limited 
extent, must ever be too meagre to result in civiliza- 
tion. These are Capital and Social Organization, and 
the f6rmula for them is sine, minimum, iii The rela- 



THE NATURE OF PRODUCTION. 39 

tive, all those circumstances, too many to enumerate, 
whose presence m greater or less degree makes produc- 
tion abundant in proportionally greater or less degree. 
The formula for these is quanta phis, tanto plus. 



CHAPTER II 

THE ABSOLUTE CONDITIONS OF PRODUCTION 

nature- labor 

§ 23 The Materials of Nature 

Roscher, §§ 31-37- Mangoldt, §§ 19, 20. Leroy-Beaulieu, Precis, pt. i, ch. L 
Schoenberg, Handbuch, vol. i, 194 sq. 

These are nature's ^ passive contribution to produc- 
tion, the stuff and basis with which the process begins. 
They are important according to : i Their abundance 
and distribution.^ ii The number and intensity of the 
needs which they serve and the perfection of such ser- 
vice.^ iii The expense in labor and capital of rendering 
them available.* iv The durability of their products.^ 
Of these materials some are wbolly appropriable,^ 
some partially so, some not at all. Those equally 
appropriable, in any given degree, are appropriated the 
more fully the better their value becomes known, the 
fewer they are in proportion to the need for them, and 
the more the use of them presupposes exclusive posses- 
sion.'^ 

1 Human nature included. "Materials" here not = "matter "; hence 
one may speak of immaterial materials. All nature is meant so far as its 
static aspect extends [§ 24, n. l], the subject for all known forces, the 
groundwork for all the phenomena of the world. But for the peculiar 
original endowment of man as distinguished from the brute, production 
would be little more than the passive reception of nature's gifts. Brutes 
do not to any extent utilize [external] nature to exploit nature. The use 



THE ABSOLUTE CONDITIONS OF PRODUCTION 4I 

of a stone by a monkey to break a cocoanut is referred to as a wonder. 
So the bird's nest, the beaver's dam and the squirrel's supply for winter. 

2 Iron will illustrate. Were it with all its valuable properties as scarce as 
jade-stone, or plentiful, yet only at a few mines, it could not possess the 
same significance for the world's work as now. The world's production 
of iron in 1882 amounted to 9 million metric tons, in 1885 to y^ million. 
That of steel was in 1882 6| million, in 1885 about 6 million. That of 
coal was in 1882, 377,707,000, in 1884 375 million [Neumann- Spallart, 
Uebersichfen d. Weltimrtschaft\. 

^ So coal is of more consequence than nickel, or even gold. Wood 
could be used for nearly all the services which coal performs, but many of 
them it would not render as well. 

* Distant or deep mines or quarries, compared with those close by and 
near the surface. Magnificent timber may grow so far away or so high up 
mountains as to have little worth. A marsh may be potentially the best 
land in all its vicinity, yet in fact good for nothing because of the cost of 
draining. The bronze age in pre-historic times preceded the iron age for 
the reason that bronze, though a compound [then of about nine parts 
copper to one of tin] could be extracted and fused much more easily than 
iron. On 'labor ' and 'capital ' see the following §§. 

^ Ledges of granite, other things being equal, are far more a treasure 
than those of marble; these more than those of ordinary sandstone. Iron 
is for the same reason giving way in many directions to steel, and wood to 
iron. 

^ As land, with its birds, animals, timber, mines and quarries, most of 
its waterfalls and many of its waters. The edge of the ocean is appro- 
priated, by nations to the distance of three miles seaward, and, by the indi- 
viduals owning adjacent land, so far out as it is available for any useful pur- 
pose [oyster-beds, e.g.\ Open ocean, tides, air, climate and sunlight 
cannot be subjected to ownership. Roscher makes the possibility or im- 
possibility of this the basis for his classification, perhaps a more natural 
one than Mangoldt's, which the text follows. 

^ It was for the last two reasons that the products of the land were 
made private property earlier than land itself, and the movable ones earliest 
of all. 



42 THE ABSOLUTE CONDITIONS OF PRODUCTION 



§ 24 The Forces of Nature 

Mangoldt, § 21. Roscher and Schoenberg, as at last §• 

In these nature aids production actively .^ They vary 
in importance, according to abundance, availability and 
necessity,^ much as the materials do, the most note- 
worthy special circumstances being a) their kinds and 
degrees,^ b) their stability and regularity,* and c) 
their transportability.^ For economic purposes the 
forces of nature are conveniently classed, sometimes 
(i) as organic ^ and inorganic, the former partly psychi- 
cal and partly physiological, the latter partly mechanical, 
partly chemical ; sometimes (ii) as spontaneous, need- 
ing only to be applied and directed by man, and non- 
spontaneous, requiring first to be developed '^ as well ; 
and sometimes (iii) as inappropriable, because charac- 
terizing whole districts or lands,^ and appropriable, as 
properties, now of fixed, now of movable objects. 

1 Whether or not matter is at bottom anything but force, Economics 
has no need to inquire. Nature in her dynamic aspect [§ 23, n. i] is here 
our theme. Some of the items referred to in §§ 23, 24 connect themselves 
about as well with the one phase of nature as with the other. Margoldt 
mentions mineral treasures and land-fertility under " forces." 

2 See § 23. As to availability we may recall that the arc principle of 
electric lighting was known so early as Sir Humphry Davy's experiments 
in 181 3, but no method of generating electricity cheaply enough to make 
the discovery valuable was invented till about 1878, in Brush's dynamo. 
The incandescent principle too was understood for years previous to the 
application of it by Edison, which made it a commercial success. Nearly 
every one of men's most precious insights into nature has thus lain sterile 
for a longer or a shorter time. 

^ Many merely do what men could at some rate do, others, the same in 
kind, transcend in degree the utmost reach of human energy. Nature's 



THE ABSOLUTE CONDITIONS OF PRODUCTION 43 

chemical forces, as also the propensities and many of the powers of brutes, 
are intrinsically unlike any which unaided man could supply. 

* A brook's value as a water-power is greatly lessened if it habitually 
dries up in summer. Wind sometimes drives sailing vessels faster than 
steamers can go, but it is not to be depended on. Hence windmills are 
used only for irregular work or where trustier motors fail or are very costly. 

^ Water-power has to be used in situ. Coal can be carried far, though 
with difficulty and expense. Suppose it were but a hundredth as heavy or 
bulky as it is ! It is estimated that could the power of Niagara be trans- 
ported thither it would furnish all the light, heat and power needed by 
New York City. This may one day come to pass by turning the force into 
electricity, carrying it either stored or by means of conductors, and re- 
converting it as needed. 

^ Belonging to human beings, lower animals, plants. Among the physi- 
ological do not overlook the reproductive forces of animals and plants, on 
which the evolution of varieties depends. 

■^ This difference well illustrated by a water or a wind mill on the one 
hand and a steam mill on the other. As civilization and man's mastery of 
nature go forward, the spontaneous forces lose in relative importance and 
the developed ones gain. 

8 Winds, tides, navigable streams, the sun's heat and light, 

§ 25 Labor: its Necessity 

^j7/, bk. i, ch. i. iT/'Cw/ZofA, pt. ii, ch. i. Gamier, c}a.\\\. C/ar^, Philos. of Wealth, 
ch. ii. Schoenberg, vol. i, 196 sqq. Robinson, Thoughts on W. and its Sources. 

Labor is the exertion ^ of human beings directed 
toward productive or economic ends. It consists in 
'the action of spirit on itself and on matter,' ^ always 
involving an intellectual as well as a physical element. 
Labor is equally with nature a fundamental ^ requisite 
to wealth. But for it ' mankind would necessarily perish 
off the face of the globe even if all soils were fertile and 
all climates temperate.'* On the other hand it is, how- 
ever important, a means only,^ not an end. 

1 Sometimes it is said to be the ' voluntary ' exertion, etc., this word 
being added to exclude slaves' work. But it is far more natural to call 



44 THE ABSOLUTE CONDITIONS OF PRODUCTION 

this labor than to rank it with the energizing of brutes. Labor is exertion, 
" and it is necessary to include in the idea not only the exertion itself but 
all feelings of a disagreeable kind, all bodily inconvenience or mental an- 
noyance connected with the employment " [Mill]. Not all human activity 
is labor. Activity may have merely the aim of enjoyment. Yet sport en- 
gaged in with the express aim of rendering one's self efficient in labor 
might itself be classed as labor. 

2 Roscher. So J. B. Clark : "To a large and controlling extent the 
mental element is present in the simplest operations. With the laborer 
who shovels in the gravel-pit the directing and controlling influence of 
the mind predominates to an indefinite extent over the simple foot-pounds 
of mechanical force which he exerts." On the other hand no labor is 
purely mental. Pen, tongue, or at least brain must be employed in 
every kind. Mill, after Bacon, rightly resolves all physical labor into an 
impartation of motion to some portion of matter. 

3 More truly so than capital, as we shall see. 
* Cannan. 

5 This to warn against such common vagaries as that whatever ' makes 
work ' must be a blessing and whatever lessens it a bane. Conflagrations 
make work : machines and inventions save work. 

§ 26 Its Forms 

Mill, bk. i, ch. ii. Roscher, § 38. Cohn, 290-298. Clark, as at § 25. Held, Grun- 
driss, § 5. 

The chief forms assumed by labor are^ : i Invention 
and discovery, ii Getting in possession nature's spon- 
taneous gifts, either by mere occupation or by extrac- 
tion, iii Creating raw materials by the manipulation 
of nature's forces, as in agriculture and stock-rearing, 
iv Manufacturing the crude effects of ii and iii into 
higher forms, v Distributing things already formally 
produced, vi Exchanging the same, vii Imparting 
instruction, viii Securing protection, ix Directing 
the labor of others, x Making laws. 

1 The classification is nearly that of Roscher, as above, only dividing 
his one class of " services " into our vii, viii and x, and inserting ix, which 



THE ABSOLUTE CONDITIONS OF PRODUCTION 45 

he omits. We shall find that the function of the entrepreneur, contractor, 
undertaker, or middle-man is at bottom but a species of labor. Clark's 
arrangement of labor-products in four classes : elementary utilities, form 
utilities, place utilities, and time utilities, is good as far as it goes, but is 
meant to allow for material wealth alone. With this § cf. § 20- 



§ 27 Its Relation to Nature 

Mill, bk. i, ch. i, § 3. Leroy-Beaulieu, Precis, pt. i, chaps, i, ii. Roscher, § 37. 

In no form of production can one of these factors be 
strictly pronounced more important than the other, 
since each is absolutely indispensable.^ Yet if meas- 
ured by Ibulk different products display the presence of 
the two ingredients in very various degrees,^ the general^ 
rule being that the labor-element in wares predominates 
in proportion to removal from their crude state. Intel- 
lectual wealth too is built up with less or greater labor 
according to richness of native endowment in its subject. 
Nor if measured in dollars' worths do equal amounts 
of the different species of wealth embody labor equally,* 
though the correspondence is in this case much closer. 

^ " The part which nature has in any work of man is indefinite and 
incommensurable. It is impossible to decide that in any one thing nature 
does more than in any other. One cannot even say that labor does less. 
Less labor may be required, but if that which is required is absolutely 
indispensable, the result is just as much the product of labor as of nature " 
[Mill]. He adds that when two conditions are thus equally necessary 
to a result, the endeavor to fix their relative proportions of contribu- 
tion is like attempting to decide which blade of a pair of scissors is the 
more efficient; or whether 5 or 6 is the main factor in their product, 30. 
On the impossibility of ascertaining with any exactness the mass of labor 
which has entered into any commodity, Mill, bk. i, ch. ii, § I. 

2 A ton of steel and a ton of needles or of watches. The average pro- 
duction of the Torrid Zone, taken bulk-wise, contains far less labor than 
that of the North Temperate. 



46 THE ABSOLUTE CONDITIONS OF PRODUCTION 

2 General, not by any means universal, since mere occupation is some- 
times, as in the case of diamonds, an affair of much labor. A buffalo robe 
stands for several times more labor now than in 1850. The extraction of 
ores often requires the finest appliances of mechanic art, to be had and 
used only at immense outlay. Of different petroleum wells, costing each 
the same amount to bore and work, one has been known to yield, for a 
considerable period, oil 2000 times beyond the average product of other 
wells which were still pumped with more or less profit. 

* This against the labor-value fallacy of Adam Smith, Marx and the 
socialists generally. Cf. Mill, as cited in n. I, above. The dollar measure 
is of course the same as that of exchange value. The correspondence to 
amounts of labor would be no more perfect were goods to be rated accord- 
ing to their degrees of utility, or according to their values proper [oner- 
ously created utilities: § i, n. 6]. 



CHAPTER III 

THE RELATIVELY ABSOLUTE CONDITIONS OF 
PRODUCTION 

capital-social organization 
§ 28 Capital Defined 

Ad. Smith, bk. ii. Mill, bk. i, ch. iv. Marshall, Economics of Industry, bk. i, ch. iit. 
Roscher, § 42. Sidgwick, p. 143. Clark, Cap. and its Earnings, Papers of Am. Ec. 
Ass., vol. iii. Leroy-Beaulieu, pt. i, ch. iii. Cossa, Saggi di Ecotioniia Politica, 
pt. iii, I. Siipiuo, II Cnpitale neW Organismo Economico. Schoenberg, vol. i, 
206 sqq. Knies, Geld, I. BShm-Bawerk, Kapital u. Kap.-zins. 

CapitaP is the name of all products, material or 
immaterial, which are engaged in or devoted to^ the 
mission of helping labor to create further products. 
It is thus one great department of wealth. Sharply to 
be distinguished from it are, (i) non-capital wealth, viz., 
the portion of wealth destined for immediate consump- 
tion, and (ii) property which is not wealth at all but a 
condition of wealth, like land^ apart from improvements 
thereon, and the original endowments of slaves. The 
boundary between capital and other wealth often wavers 
and is sometimes untraceable, an article's place on this 
or that side of the line frequently depending on the 
owner's varying- intention, and many things being used 
now for gain, now for pleasure. 

1 There have been and still are many different conceptions of capital : 
i The classical, medioeval and mercantilist, making it the same that is now 
called "principal," as opposed to interest, — in Greek, KecpdXaiov; in Latin, 
caput, or capitalis pars debiti. ii The physiocratic, by which capital 



48 THE ABSOLUTE CONDITIONS OF PRODUCTION 

means massed, reserved or stored material products of any kind [not money 
alone], whatever their destination. Knies still defines thus, iii The mod- 
ern, taking it to include all means of production vs^hatever their origin, i. e., 
land as well as capital, iv The most modern : capital consisting only of 
produced means of production, land excluded therefore, and regard had to 
both origin and end. iii and iv afford each a still further division accord- 
ing as capital is thought of as material only or as in part immaterial also. 
The text gives iv in its second phase. H. George's definition [Prog, and 
Poverty, bk. i, ch. ii, end], capital = wealth in course of exchange, is practi- 
cally equivalent to iv in its first phase. 

'^ Products may be * devoted to ' further production yet temporarily idle, 
as in a factory or foundry during hard times. Such property may be called 
'dead capital,' and in this sense alone is capital usually styled 'dead.' 
But 'dead' would not be aa inapt appellation for it when only techni- 
cally productive [§ 21, n. 4]. Capital is by no means dead simply because 
passive and inert hke an instrument, instead of living and growing like 
animals and trees, though this distinction is worthy of notice [Prog, and 
Pov., 162 sqq. Cf. Bastiat's fable of the plane, in his pamph. on Capital et 
Rente, CEuvres, vol. v, 43 sqq.]. Things made for sale but which no one 
wants are not capital at all : nor, as a rule, are they even wealth, but waste 
rather. H. George [bk. iii, ch. iv] speaks of 'spurious' capital, meaning 
partly values, like land, that are miscalled capital, partly those employed, 
as in gambling, productively perhaps for A or B but not for society. 

3 For ruling out land [proper], see H. George, Social Problems, 183 sq.. 
Prog, and Pov., bk. iii, ch. iv; also Cossa, as above, 162. 



§ 29 Kinds of Capital 

Roscher, § 42. Ad. Smith, bk. ii. Schoenberg, vol. i, 212 sqq. 

Roscher has well classified the various forms of capital 
as follows : i Improvements upon land, ii Building's, 
streets and roads, iii Tools, instruments and machines.^ 
iv Useful domestic animals, v Materials for manu- 
facture which will reappear visibly in the product.^ 
vi Materials to aid manufacture which will not thus 
reappear.^ vii Food and clothing for the support of 
laborers while they labor, viii Stocks of goods for sale. 



THE ABSOLUTE CONDITIONS OF PRODUCTION 49 

ix Money, x Incorporeal or immaterial capital. To 
this list we have only to add weapons and means of 
transportation. Capital is often conveniently classi- 
fied more briefly, as a) materials to work up, b) tools* 
to work with, and c) subsistence.^ Very important is 
the distinction between free and specialized^ capital, 
and still more so that between fixed and circulating.'^ 

^ An instrument is passive in nature, a tool [perhaps from same root 
as ' do '] active. A saw-buck is an instrument, a saw a tool. When an 
extra-human force is joined to either or to the two combined we have a 
machine. Historically such motors have been applied in the order of 
i brute strength, ii water, iii wind, iv steam, v electricity. For pulverizing 
grain, hammers were first used, then, in order, hand-mills, ass-power mills 
[Matthew 18, 6], water-mills [which Roscher dates frum Cicero's time], 
wind-mills [from 9th century] and steam-mills [since 1782]. 

2 As wool, cotton, flax, and coloring matters in cloth, leather in shoes, 
etc., also all sorts of ornamentation. 

3 As coal, bleaching material, lubricants. 

* Here taken in the largest sense, including machinery and buildings. 

^ Clothing and houses as well as food being meant. 

^ According as it is not or is so bound up with a given kind of produc- 
tion as to be applied to another only with much difficulty and loss. De- 
struction of the free variety is dollar for dollar more disastrous than that of 
the specialized. Cf. H. C. Adams, Outline, §§ 18, 19. 

"^ Capital which, e.g., mills, machinery, etc., exists a considerable time 
in any one relatively permanent form, aiding repeated processes of pro- 
duction, belongs in the former category; that which fulfils its entire func- 
tion as capital of a given kind [changes its nature : is used up] in a single 
process of production, comes under the latter. Raw material and all goods 
kept for sale well illustrate circulating capital. A grindstone lying in a 
hardware store is circulating; revolving in a shop, fixed. So of all ma- 
chinery. Money is fixed capital for society, circulating for the individual. 
This- distinction is relative, as no capital is absolutely 'fixed.' Even money 
wears out : namqtie in ipso usu adsidua permutatione quodammodo extin- 
guitur [Instt. of Justinian, II, 4]. The proportion of fixed to circulating 
capital in any community increases with the advance of civilization. 



50 THE ABSOLUTE CONDITIONS OF PRODUCTION 



§ 30 The Place of Capital in Production 

Marshall, 3LS,aX % 2Z. i(/z7/, bk. i, ch. v. C^i^r^^, Prog. andPov., bk. i, ch. v. Cairties, 
Leading Principles, 164 sqq. Senior, Pol. Ec, 58 sqq. 

The following propositions touching capital are funda- 
mental and of first importance : i All capital is the re- 
sult of labor and secondary thereto,^ and all material 
capital the fruit of abstinence ^ and economy, ii On 
the other hand all labor is dependent for its efficiency 
on capital.! iii The real support of labor consists in 
the capital which it employs and not in demand for the 
commodities or services it yields.^ iv Material capital 
is a g-ood only as it ministers to consumption,* and it 
is itself destined to be consumed.^ 

1 Sir William Hamilton's elucidation of the intimate relations between 
speech and language, by citing the operation of tunnelling through a sand- 
bank, is to our point here. As the digging must precede the shoring of 
plank or brick, yet can only just precede, and as thought must exist in ad- 
vance of speech but only be a little in advance, so labor is the absolute 
prius of capital, and still totally dependent upon capital for any considera- 
ble development. 

2 A function quite distinct from labor, and very important. See Senior, 
as above. This subject will emerge again when we discuss Interest, in 
Part IV. Cf., too, § 46. 

^ Mill, bk. i, ch. v, § 9, needlessly obscures this important truth, yet is 
clearer than Laughlin, who, in his edition, has substituted his own for 
Mill's exposition. The idea is simply that no matter how great the demand 
for a commodity, unless it were of an extremely simple order, labor would 
not be encouraged to attempt the production of it so long as no one willed 
to supply capital to aid. Any increase to the stock of [non-specialized] 
capital increases the demand for labor, and [barring increase in number of 
laborers] elevates the level of v/ages. On the contrary, any such applica- 
tion of wealth as merely to act on demand and not to swell the stock of 
capital, robs labor of so much support. Demand alone, however, [efficient 
demand is of course meant, i.e., wish backed by money] is competent to 



THE ABSOLUTE CONDITIONS OF PRODUCTION 5 1 

change the direction, the department, in which labor shall apply itself. It 
might conceivably, by some peculiar concourse of circumstances, set capital 
free in such a way as to render it more serviceable than in its previous 
form, thus, without being increased at all, actually furthering the interests 
of labor. Fresh production of capital will result, but only as a consequence 
of the encouragement given to labor. Thus, suppose ^looo are spent for 
liquors, and the money placed by the liquor-dealer in the bank, whence of 
course it is at once loaned out to aid industry and so labor. Mill ignores 
this possibility. It would confessedly be better still for labor had the 
money been applied in the first instance as supply instead of as demand, 
which is all that Mill shows. But if his statement is not valid quite as 
unqualifiedly as he supposed, this fact detracts not a whit from its impor- 
tance. The laiu is as he declares. Nor does this admission bind us to 
accept his theory of wages [see Wages, in Part IV] . 

* Not that consumption in se is a good. It is only a means to a good, 
viz., the gratification lying beyond. But as it is an indispensable means, 
men being constituted with needs which only economic consumption can 
supply, production becomes worthful for consumption's sake. Could the 
end be reached without consumption, the latter would at once cease. A 
machine which could do its work and never wear out, would be a prize. 
Hence the search for perpetual motors. Hence, too, the more fruitful 
quest for instruments which will do given amounts of work with the least 
motive power and friction. 

^ Why, then, is it so valuable? the pupil might at first ask. If it must 
return to nothing, why call it into being in the first place? Because capi- 
tal, though perishable, is still indispensable. If it perished twice as fast, 
were we forced to spend double the time we now do in replacing it, we 
should have no choice but to toil for it as at present. Material capital 
more than pays for itself during its brief life, and besides may be so con- 
sumed as to reproduce itself, and more. Thus individuals die, but the race 
lives and spreads. Far the greater part of the capital at any moment exist- 
ing is less than a year old. Almost trifling in quantity is that which is 
over ten. But the entire bulk of capital in man's possession now was 
aided into being by that long since consumed. Every nail in England 
can be traced back, directly or indirectly, to savings made before the Nor- 
man Conquest [Senior]. 



52 THE ABSOLUTE CONDITIONS OF PRODUCTION 



§ 31 Society 

Clark, Philos. of Wealth, ch. iii. Weeden, Social Law of Labor, Int. Bastiat, Har- 
7nonies, ch, i \(Euvres, vol. vi, 24 sqq.]. Spe7icer, Principles of Sociology, pt. ii, 
ch. ii. Villey, Role de I'etat dans Vordre econ. 

To be in the least degree copious, production requires 
the existence of society. Man is by nature a social 
being.i The individual of himself does not form a 
totality. Society must complement him. Except as 
parcel and facet of the social body he can be nothing 
but a fragment. Now society is an organism, its units 
so vitally related that, as in a tree ^ or in the animal 
frame, each is both end and means, at once serves and 
is served by all the rest. Not only are the productive 
powers of the individual as such incapable of develop- 
ment without a human environment,^ but even if de- 
veloped they would be useless, having no scope for 
action.* Social organization, the interplay of supply 
and demand, the right mutual relations between pro- 
ducers and consumers would be needed. 

1 A " political animal," as Aristotle calls him. Genesis, II, 18 : " not 
good for man to be alone," has the same meaning. It does not refer to 
marriage simply. 

2 "The rootlet of a tree shares with the remote leaf the nutriment which 
it absorbs from the earth, and the leaf shares with the rootlet that which 
it gathers from the sunlight and the air. This universal interdependence 
of parts is a primary characteristic of social organisms; each member ex- 
ists and labors, not for himself but for the whole, and is dependent on the 
whole for remuneration. The individual man, like the rootlet, produces 
something, puts it into the circulating system of the organism, and gets 
from thence that which his being and growth require." Clark, as above, 
38 sq. Cf. ante, §§ 12, 13, 15, and notes. 

^ This side of the truth Bastiat in his fine discussion overlooks, as do 
all the writers, like Adam Smith and his disciples, whose notion of society 



THE ABSOLUTE CONDITIONS OF PRODUCTION 53 

came from eighteenth century liberalism. They have been too apt to con- 
ceive the individual man as complete in himself, and society as a mere 
aggregation of such individuals, sustaining to one another, indeed, rela- 
tions the most complicated, but not organic [§ 15, n. i]. Rousseau's 
" Social Contract " is the classic for this theory of society. 

* Bastiat, as above, computes that through social co-operation and the 
consequent amassing of wealth, one man may by his own efforts enjoy now 
more satisfactions than he could earn in ten centuries were he obliged to 
begin and work without such aid. " If the causes of a man's economic 
weal or misery once lay in what he himself did, now they are to be found 
as well in what is done and experienced by those a) for whom he produces, 
b) whose products he desires, c) who produce for others in the same line 
as he, and d) desire from others the same product as he " [Knies, Pol. 
Oek., 164 sq. Cf. Ely, Past and Pres. of P. E., p. 50]. Take an operative 
in A's cotton factory, earning ^1.50 per diem. That wage is conditioned 
upon the existence of: i The factory, with its owner and his capital. 
ii Builders of factories and machinery, with their respective plants and 
groups of workmen, insuring to A the possibility of repairing or replacing 
his plant were it injured by fire, storm or earthquake, — each man in all 
these groups being bound in the same mesh-work of relationships as the 
operative in question, iii Men working southern cotton-fields, every one 
dependent in this same way. iv People similarly circumstanced engaged 
in the manufacture of implements for cotton-raising, v Still others, so 
circumstanced, building and running steamboats and railways to transport 
the various wares mentioned, vi Human beings in all lands who wish 
cotton fabrics and have means to buy them, vii Morality, customs and 
laws, making possessions and traffic secure, viii Teachers, writers, legis- 
lators, judges, police and army, giving sustenance to vii, each enabled to fill 
his place only by a complex congeries of action and reaction like this 
which we are tracing. 

§ 32 The State 

Wagner, Lehrl. d. Pol. Oek,, § 161. James, et al., in Science Economic Discussion, 
26-43. Schoenberg, vol. i, 197, 255 sqq. Spencer, Prin. of Sociology, pt. v. 

Every separate permanent human community sponta- 
neously 1 assumes more or less authority over its mem- 
bers, forcing each, within certain limits, to obey the 
collective will. This is inevitable. Such authority 



54 THE ABSOLUTE CONDITIONS OF PRODUCTION 

always has been exercised, and always will be,^ however 
high a degree of moral, political or economic advance- 
ment may be reached. In its character as asserting and 
exercising this eminent domain society becomes the 
state. Society is in principle no less indispensable 
economically in this aspect than in that of an organism 
merely. Not alone anarchy but the slightest real in- 
security to life or property will paralyze production. 
Even among the best-meaning citizens there must be 
some authoritative tribunal to settle honest disputes. 
Besides, nearly all peoples have vital interests of a 
purely economic nature which only the state can 
administer.^ 

1 We see this from what occurs in mining camps and caravans, and 
among pirates. Government does not originate in contract any more than 
life does, though a particular form of polity may thus arise. 

2 Contrary to the belief of the anarchists, M^ho expect to take out of 
government the whole element of authority, reducing it to mere adminis- 
tration [§ 14, n. i]. This cannot be. It is not the wickedness of men, 
which may in time abate, but the permanent finiteness of their knowledge, 
that renders anarchy impossible of realization. 

3 See § 15, n. 2; § 36, n. 7. Cf. Villey, as at § 31. Thus, England 
never had an efficient express system till Fawcett, as Post-Master General, 
introduced the Parcels Post. Then all the railways took up the business 
and accommodations of this sort became good. 



CHAPTER IV 

THE RELATIVE CONDITIONS OF PRODUCTION 

§ 33 General View 

Mill, bk. i, chaps, vit-xiii. Mangoldt, pp. 20-44. Gamier, pt. ii, sec. iii. Cannan, 
§§ 5 sqq. Held,'p.^%. Schoenberg,vo\.\,x<^Z-2(iZ. Roscker, zoy-2og. Ad. Smith, 
bk. i, ch. i. Cossa, Elementi, sec. ii, ch. iv. Bagehot, Ec. Studies, vi. 

All four of the preceding conditions being given the 
production of wealth will ensue, but will be more or 
less abundant according to a multitude of further 
circumstances. The chief of these are now to be dis- 
cussed. They include whatever increases the amount 
or the efficiency of either capital or labor, viz., those 
things^ which somehow (i) promote man's power to 
save wealth, (ii) quicken his will to do the same, 
(iii) prompt the determination to labor, (iv) better the 
quality of labor, (v) strengthen the labor-force of the 
country or countries in question, or (vi) enable men to 
make the most out of a given amount ot labor. The 
progress will take place through such an application of 
the free capital and labor available from time to time, 
as shall not only make good all consumption involved 
but also create a surplus.^ This may occur in either of 
three ways : i Increase of product without propor- 
tional increase of expense. 2 Diminution of expense 
without proportional diminution of product. 3 Increase 
of product along with diminution in expense. The 
result, like the aim, will be a continual reduction on 



56 THE RELATIVE CONDITIONS OF PRODUCTION 

the whole,^ in the amount of human toil necessary for 
a unit of product. Human needs being expansive, 
however, and the utmost possible supply to them limited, 
labor can never become unnecessary, nor decrease in 
absolute quantity, but only relatively to product. 

1 The power to save depends on good government, industrial liberty, 
thrift, etc.; the will to labor or to save, on morality, freedom, private prop- 
erty, culture, high rate of interest, and the like; the labor force, on num- 
bers, favorable climate, health, strength; the quality of labor, on such 
considerations as intelligence, education, and practice. Chief aids to the 
ability to make most out of a given amount of labor are machinery and 
the organization of labor. See on all this §§ 35 sqq. 

2 Sir William Petty, Political Arithmetic, ch. i, names this process of 
progressive increase to wealth, ' superlucration ' — not a bad term. 

2 ' On the whole,' because although, as pointed out in § 34, agriculture 
and mining follow another law, the disadvantage thus arising bids fair to 
be offset for an indefinite time to come by the greater and greater cheap- 
ness of manufactured articles. 

§ 34 Diminishing Return and Increasing Return 

Marshall, bk. i, ch. iv. Sidgwick, 151 sqq. Walker, Wages, 89 sqq. Cairnes, Log. 
Meth., 50, SI, n. H. C. Adams, Principles to Control State Interf. in Industries. 

The general rule of growth in production is : the 
more effort applied to nature, the more product, effort 
including capital also, as hoarded labor. If, however, a 
long period of time is considered, two important varia- 
tions from this are perceived to hold. In agriculture 
and, with modifications, in mining, the law of diminish- 
ing return ^ prevails, that, in the long run, increase of 
effort secures a less than proportional increase of 
product. The operation of this law in agriculture may 
sometimes be temporarily postponed and even dispro- 
portionately large returns secured, by (i) increase of 
population,^ (ii) improved machines and methods. 



THE RELATIVE CONDITIONS OF PRODUCTION 5/ 

(iii) bringing, in a new country, more fertile or conven- 
ient land under cultivation. ^ Manufactures on the 
other hand are, as a class, subject to a law of increas- 
ing return, the creation of their products growing 
steadily less and less costly per unit.^ Increasing re- 
turn characterizes in a marked manner all special 
industries which, while ministering to wide, regular 
and decided needs, enjoy some sort of a monopoly,* 
natural, governmental, or based on vastness of capital. 

1 This law forms the basis of Malthusianism [§ 15, n. 5]. H. C. Carey 
supposed that in demonstrating [iii] , above, he had refuted the law, and 
Malthus's doctrine along with it. He did neither. 

^ There is a certain point up to which the greater the population on a 
given territory the greater x'Va per capita yield; and beyond which additions 
to population will have the reverse effect. This may be called the point 
of ' saturation.' 

3 Cf. § 33, n. 3. 

* In proportion to the firmness of the monopoly, cost of production 
r§§ 47, 48] will cease to fix prices, these rising higher and higher till 
checked by lessened demand. But if the products are necessaries of life 
prices will go very high before demand will be greatly affected. 



§ 35 The Labor-Force: Extent 

Mangoldt, 23-44. MtU,hV.i, ch. -x.. Smith [R. M.], Statistics and Economics, pt. i 
[pubb. of Am. Ec. Ass'n, vol. iii]. Block, Statisqne, ch. xv. Cohn, I, i-iii. 

To the point of saturation,^ a country or community 
is productive, other things being equal,^ according to 
the extent of its labor-force.^ This is great for any 
period in proportion as : i Population is large, ii There 
is excess* of births over deaths, iii Such excess is 
maintained more by paucity of deaths than by multi- 
tude of births.^ iv Emigration is prevented and im- 
migration encouraged, v The people are hardy and 



58 THE RELATIVE CONDITIONS OF PRODUCTION 

temperate, vi Males, yet not too greatly, outnumber 
females.^ vii Working- hours per day are long and 
holidays infrequent.^ viii Idle, helpless, and ineifi- 
cient persons are few.^ 

1 § 34, n- 2. 

2 Bear this condition carefully in mind. 

8 Not population alone is meant, nor the number of persons who com- 
monly, or ever, work; but the tale of hours' works, say, in a year. Quality 
is treated in § 36. 

* This, with consideration iv, determines whether population is growing 
or not. A decreasing population is abnormal, yet not so rare : the Ameri- 
can Indians [Andov. Rev., Aug., 1886], the South Sea Islanders, the Irish 
in Ireland, the French in certain districts of France. Smith, as above, 
p. 45. In Ireland the deficit is from emigration, in France from excess of 
deaths over births. 

^ Since if by the latter, much sickness is involved, calling from work 
not only the patients but also their attendants. Take Norway and Bavaria. 
B. has much the larger birth-rate, 37.3 per 1000 inhabitants yearly, to N.'s 
34.7. But it also has very much the more rapid death-rate : 30.4 to N.'s 
18.9 [the lowest known] ; so that its yearly increase per 1000 is less than 
half N.'s, viz., 6.9 to 15.8. France has a very low birth-rate, 26.2; also an 
exceedingly moderate death-rate, 23.9, only Belgium [23.7] and Norway 
[18.9] having lower. But Belgium has a considerably better birth-rate, 
23.7, so as to increase 7.9 per 1000 each year to France's 2.3. 

^ In the world at large 106 males are born to 100 females, and the pre- 
ponderance continues till about the age of puberty. After that, the numer- 
ical relation is reversed, and holds so through life. More work commonly 
done by women can be done by men, than vice versa. For women to per- 
form tasks fit only for men, in time weakens the entire population. But 
too great excess of men would mean slow, or no, numerical growth. 

"^ I.e., the more hours of work the greater the production, provided energy 
is maintained [§ 36]. But as human endurance is limited the per diem 
task must be, and a holiday now and then works well. The observance of 
Sunday is undoubtedly an immense aid to a people's productive power. 
Where the Greek or the Catholic religion prevails, on the other hand, holi- 
days are too numerous for utmost productiveness [Walker, Wages, 20]. 

8 Those who cannot or do not support themselves. Here are usually 
reckoned all persons under 15 and over 70, the remainder constituting the 



THE RELATIVE CONDITIONS OF PRODUCTION 



59 



population of productive age. In France 68.6 per cent are of this age; in 
England, 61.2; in Germany, 62.7; in the U. S., 59.6. The more slowly a 
population increases the larger will be its proportion of adults. Then there 
are the defectives, constituting, of each 100,000: 



IN 


Blind. 


Deaf Mutes. 


Idiots. 


Insane. 


Total. 


Italy 

Germany .... 
Great Britain . . . 
Norway .... 

Sweden 

Belgium .... 

France 

United States . . . 


105 

87 
98 
136 
80 
81 
83 
96 


74 
96 

57 
92 
102 

43 
62 
66 


65 
139 
129 
119 
39 
50 
114 
152 


99 
88 
178 
i8s 
176 
92 
146 
182 


343 
410 
462 
532 

266 
40s 

496 



To be added are the idle aristocracy, of blood or of wealth, monks, 
nuns, superfluous clergy, soldiers, and various classes of servants. Spain, 
under Philip III, had 988 nunneries and 32,000 mendicant monks. In 
1787 it had 188,625 religious persons, 480,589 nobles, and 280,092 people 
at service. Beggars certainly increased the number to a million, while the 
exclusively productive classes then were under 2\ million. Portugal in 
1800 had 200,000 religious to 3 or 3^ million inhabitants [Roscher, § 54]. 
Sir W. Petty, Pol. Arithmetic, ch. iv, argues that France, about 1665, had 
250,000 needless clergymen, each consuming 18 pence worth a day, which 
he says was triple what a laboring man required. In contrast with these 
cases, by the U. S. census of 1880, of the 17,392,099 persons in gainful 
callings here [being 34.68 per cent of the entire population], only 4,074,238 
were engaged in personal and professional services. The others wrought 
at agriculture [7,670,493], trade and transportation [1,810,256], and in 
manufacturing, mechanical and mining operations [3,837,112]. 



§ 36 The Labor-Force : Quality 

Mangoldt, as at § 35. Mill, bk. i, ch. vii. Roscher, bk. ii. Cherbuliez, bk. i, ch. v, 
sec. ii, iii. Walker, Wages, ch. iii. Brassey, Work and Wages. Marx, Capital, 
ch. XV. 

The efficiency of labor may vary greatly between two 
communities whose hours of work per annum are equal, 
one excelling the other in the skill, spirit, and vig-or with 
which the work is done. Superiority in these traits will 



60 THE RELATIVE CONDITIONS OF PRODUCTION 

turn upon : i The native strength, enterprise, and will- 
power of the people.^ ii Their habitual diet, iii Their 
moral development. ^ iv Their intellig-ence, natural and 
acquired. Industrial and technical training are here of 
incalculable importance, yet not more vital, on the whole, 
than is general education.^ v Favorable relation of 
workmen to product. The self-employed are usually 
the most diligent and earnest, co-operators next, then 
piece-wage-workers, then time- wage.* High pay begets 
zeal ; low, apathy, vi Reasonable work-hours, daily 
and weekly, neither too few nor too many,^ fewer for 
women than for men, fewest for children, vii Honora- 
ble political status^ of the laboring population. Serfs 
will out-toil slaves, free men do better still, those with 
the electoral franchise best of all. viii Good govern- 
ment,''' equitable and stable laws, fiscal and other, just 
and firm administration. 



1 In all which prevail differences so great as at first to seem incredible. 
Thus, the lifting power of a Van Dieman's Land native and that of an 
Anglo-Australian differ as 50 to 71 [Batbie, cited by Walker]. Peoples 
near together too are often extraordinarily unlike in these qualities. An 
English laborer is said to do double the work of a French. Some of the 
peculiarities are inexplicable, lost in the mystery of race-idiosyncrasies at 
large; others traceable to national experiences and habits, favorable or 
unfavorable [Mangoldt, § 25]. 

2 Conscience favors (i) fidelity to appointed work, (ii) care for mate- 
rials, (iii) obedience to law. In all these ways expense for oversight and 
police is obviated. Conscientiousness also implies contentment and hope, 
industrial qualities of first moment. To all co-operative forms of industry, 
to all organization of labor, it is absolutely indispensable. 

3 Not only acquired industrial abilities, a form of capital [§§ 28, 29], are 
needed, but large, diversified, and widely distributed intelligence whatever 
its source. The point is not that this will tell in the level of a people's 
enjoyment — of course true; but that high productive efficiency itself is 



THE RELATIVE CONDITIONS OF PRODUCTION 



6l 



conditioned upon it. On industrial education, see Monographs of the 
Industrial Ed. Ass'n., N. Y. City. 

* Roscher, § 39. Here is a table illustrating this, adapted from H. C. 
Adams : 



THE WORKMAN HAS 



CONSEQUENTLY 



Slavery, 



The 

Ordinary-Wages 

system, 



The 

Piece-Wages 

system, 



Profit-Sharing 

or 
Co-operation, 



No rights, civil or poli 
tical; pay determined 
by animal wants. 



Civil and perhaps po- 
litical rights, but no 
legal property in pro- 
duct; pay determined 
before work is done. 

Civil and perhaps po- 
litical rights, but no 
legal property in pro- 
duct; pay determined 
by work done. 

Civil and perhaps po- 
litical rights; also 
property in product; 
pay determined by 
work done. 



No interest in quantity 
or quality of work 
done; no care for 
material. 

No direct interest in 
quantity or quality 
of work done, or in 
care for material. 



Interest in quantity 
only; otherwise same 
as above. 



Direct interest in both 
quantity and quality 
of work done, and in 
care for material. 



Only low-grade indus- 
try possible. 



High technical skill 
possible, but no guar- 
antee of continuous 
or contented industry. 



Greater encouragement 
while work lasts ; oth- 
erwise same as above. 



An ideal system wher- 
ever applicable. Mar- 
shall, bk. iii, ch. ix. 



That they are usually better paid in America is among the chief reasons 
why our immigrants achieve more here than in their old homes. Not al- 
ways have they this advantage. We cannot infer it from their mere nomi- 
nal wages. On real as distinguished from nominal w., see under Wages, 
in Part IV. 

6Cf. §43, n. 5. 

* Cf. note 4. This too is a most powerful cause of their improved pro- 
ductivity on coming hither from the old world. 

'^ The /orm of government has much effect. See notes 4 and 5. Nearly 
or quite as important is its solidity. Witness the industrial backwardness 
of Mexico, Central America, Peru, Turkey. Laws should be clear, certain, 
and not changed except for good cause. They should be just to all men 
and classes, partial to none. Judicious bankruptcy, currency and poor laws 
are of especially vital consequence. Still more so are those touching taxa- 
tion. The world is at this moment probably suffering more from bad tax- 
ation than from all other governmental ills together. And lastly, " The true 
test of a good government is its aptitude and tendency to produce a good 



62 THE RELATIVE CONDITIONS OF PRODUCTION 

administration " [Alexander Hamilton] . In western continental Europe 
from the 13th to the 17th century farmers could not keep sheep on account 
of the unbridled rapacity of noblemen and their retainers. Only in England 
was the king's peace firm enough. Hence England became the great wool- 
raising country, and could collect from the continent an extensive export- 
duty [Th. Rogers, Ec. Interp. of Hist., 9]. 



§ 37 Socialism and Production 

Gronlund, Co-operative Commonwealth. Also the works listed at § 14. Cohn, II, ii. 
Schoenberg, vol. i, 107-124. Hyjidman, Hist. Basis of Soc'm in Eng. 

Partly a priori, partly from the observed effects of 
co-operation, socialists argue that land and material 
capital should be made collective property, private 
fee simple in them being abolished. It is urged that 
an indefinitely more copious production would thus 
result, making it safe heavily to bond the country, if 
necessary, to pay off present proprietors. The im- 
provement is expected to come in part from a more 
perfect organization ^ of industry, saving waste of 
labor and of capital ; but mainly from the fresh hope 
and courage which would inspire the laboring masses. 
All wishing work might have it. Thirst for inordi- 
nate wealth would cease. Every commodity or service 
could be had at precisely its cost^ in labor. Society 
would no longer be robbed by gambling in stocks 
or produce, or industry palsied by fluctuations in the 
value of money. Commercial crises would be un- 
known, and corporations' passing away would render 
impossible the frauds of their managers. Henry George 
and his followers deem that the essence of this benefi- 
cent reform would follow nationalization of the land^ 
alone. It is likely that the introduction of socialism 



THE RELATIVE CONDITIONS OF PRODUCTION 63 

would to some extent quicken productive energy, though 
by no means in the degree alleged. But we see insup- 
erable obstacles to the launching of the system as ad- 
vocated, and insufferable evils sure to spring from it if 
launched. It would (i) dangerously concentrate power, 
(ii) abate thrift in some while promoting it in others, 
and (iii) repress that marvellous inventiveness, enter- 
prise, and daring in industrial undertakings which only 
the hope of great personal profit will at present induce 
in men."* 

1 This point naturally connects itself with the discussions of Chapter V. 
Co-operation and the George reform also both have this double face : they 
propose to inspire and hence increase labor, and at the same time to organ- 
ize or apply it better, so that a given measure of it may amount to more 
than now. 

2 By a system of labor-time money for the payment of wages, and of 
labor-time labels on commodities to show just how much time in labor each 
required for its manufacture [§ 14, n. 3]. You work, and are paid in cer- 
tificates of labor-time, having a face value just equal to the number of hours 
you have wrought if at unskilled labor, or twice, thrice or ten times that 
number if at skilled. Each hour of face value in these tickets purchases 
at any of the public bazaars commodity that it has taken an hour's labor 
to produce. Money and markets disappear. The scheme is ingenious 
but impracticable. See, further, under Distribution [Part IV]. 

3 § 14, n. I. 
* Cf. § 46. 



CHAPTER V 

THE RELATIVE CONDITIONS, CONTINUED 

§ 38 Extraneous Aids to Labor 

Roscher, bk. ii. Bagehot, Ec. Studies, vi. Mill, bk. i, chaps, vii-xiii. Cohn, I, i, iv, 
V, II, III, i. M'Culloch, pt. ii, sec. ii. 

Another immense and generic class of the conditions 
to production touches the ways and means of getting 
the utmost possible out of a given amount of lalbor.^ 
The principal circumstances which contribute to this 
result may be grouped in four clusters : (i) physical and 
topographical advantages, (ii) material capital in gen- 
eral, (iii) labor-helping and labor-saving inventions in 
particular, and (iv) the organization of labor itself. 

1 Those canvassed in §§ 35-37 have to do with labor intrinsically con- 
sidered, i.e., its quantity and its quality. We now suppose a certain quan- 
tum of labor, its quality so or so, and notice that it avails more or less 
abundantly according to the place and manner of its application. 

§ 39 Geography and Topography 

Cohn, 213-229. Roscher, §§ 30-37. Schoenberg, vol. i, 198 sqq. Knies, § II. 

A people's habitat is a prime determinant of its eco- 
nomic welfare. It will be helpful or the reverse accord- 
ing to : i Its territorial extent.^ ii Its superficial 
aspect, as mountainous, hilly, or plain.^ iii The nature 
of its earth-crust, as (a) soil^ well or ill rewarding cul- 



THE RELATIVE CONDITIONS OF PRODUCTION 65 

tivation, (b) a theatre of much or little spontaneous 
production, in forests, wild birds and animals,* and 

(c) a magazine of abundant or scanty raw materials, as 
coal, stone, and metals, iv The plentifulness, location 
and character of its waters. Are springs, brooks, 
ponds, and lakes numerous and well distributed ? Do 
they furnish sufficient drink, irrigation, and water-power ? 
Are rivers many and navigable far inland?^ Is sea- 
coast extensive, offering frequent and commodious har- 
bors ? ^ Are fisli'^ in rich supply ? v The salubrity of 
its climate and the favorableness or unfavorableness of 
this to production. Temperature, rainfall, humidity, 
and the strength and regularity of winds have here 
to be taken into account, vi Its location in relation to 
tlie territories of other peoples, and the character and 
resources of those peoples. 

1 It may at any given time be too great or too small for the people. 

2 How important, e.g., to the ease or expense of building railways and 
canals. 

^ Fertility and good drainage are the main qualities. 

* Ostrich-feathers, ivory, game [including supplies for menageries and 
zoological gardens], peltry, and guano are, in places, important sources of 
wealth. The presence in a country of desirable beasts, birds, insects and 
plants is of great importance, as is the absence of noxious ones. In Russia 
twenty-five miUion squirrels are killed yearly for their skins [Mulhall]. 
The Eng. gov't in Cyprus expends $15,000,000 yearly in destroying locusts. 
Block Island has the great advantage in poultry-raising that no foxes, 
skunks, or weasels are found there. 

s Nor do railroads strip this item of consequence. It is also of much 
moment whether the land is subject to floods or not. 

6 Note England's advantage herein over the Continent. Its harbors are 
not only thick, but well situated. Tides and the Gulf-stream mostly sweep 
past them instead of straight in, which so fills up those beyond the Chan- 
nel. The economic influence of the Gulf-stream on the Atlantic coast of 
Europe is obvious but immeasurable. 



66 THE RELATIVE CONDITIONS OF PRODUCTION 

■^ The late Spencer F. Baird regarded an acre of ocean equal to six of 
land in ability to produce food for man. Seals and porpoises as well as 
fish might be mentioned among the valuable gifts to us from the sea. 

§ 40 Material Capital in General 

Mangoldt, §§ 30, 31. Mill, bk. i, chaps, v, vi, xi. Ad. Stnith, bk. ii. Roscher, §§ 42 
sqq. Bagehot, Ec. Studies, vi. Rae, Prin. of P. E. [Bost., 1830], 123 sqq. 

Speaking broadly, production will be large in pro- 
portion as material capital is plenty.^ Laborers must 
have food, clothing, shelter, working-gear and stock. 
Labor-force not supplied with these becomes a burden, 
and labor-force can increase only as these multiply. 
Mere abundance for present needs is not enough. 
Healthy production requires an actual or potential sur- 
plus against emergencies. Capital in the form of roads, 
canals, dikes, piers, and public buildings may aid pro- 
duction through hundreds and thousands of years.^ 
The proportion, in capital, of kind to kind is hardly 
less important than bulk. Aside from cases of specific 
over-production, either fixed or circulating capital may 
exist in vicious disproportion ^ to the other. Prepon- 
derance of circulating is the lesser danger, owing to 
the larger possibility of adapting it to a variety of uses.* 

1 On intellectual capital as a condition of production, see § 36, iv, and 
n. 3. The richest importation the U. S. ever made came encased in Samuel 
Slater's head. The present § is to be brought into relation with §§ 29, 
30, ante. In those §§ our thought was primarily a static one. Here we 
have in view the dynamics of production. 

2 Though most capital, however * fixed ' [§ 29, n. 7], is ephemeral. The 
average life of an English locomotive, costing ^^2,000, is only 15 years, no 
subtraction being made for repairs. The average total run is 200,000 
miles [Mulhall] . American machines, the term being reduced according 
to amount of repairs, average to live but 5.07 years. The cost is ^8,000. 
A box car costs ^450, lives 9.05 years; a flat lives 8.15 years [W. C. Fisher]. 



THE RELATIVE CONDITIONS OF PRODUCTION 6/ 

8 The main cause of the hard times in 1857 was probably the locking 
up of too much capital in the form of new railways. 
* I.e., it is less specialized [§ 29, n. 6j. 



§ 41 Machinery 

Ad. Smith, bk. i, chaps, i-iii. Ckerbuliez, bk. i, ch. vi. Roscher, ' Machinery,' 
in Lalor; also Ansichten, etc., vol. ii. Mangoldt, § 36. Senior, 3 Lectt. on 
Wages, etc. Schoenberg, vol. i, 218 sqq. Marx, Capital, ch. xv. Cossa, Ele- 
ntenti, 31. 

The ability of tools and instruments ^ to help pro- 
duction is infinitely multiplied by harnessing to them 
some agent with superhuman power, as brutes,^ water, 
steam, or electricity. Machines then result, which 
(i) make possible much production not so without 
them,^ (ii) in forms of production intrinsically possible 
without,* enormously spare the health, strength, and 
morale^ of laborers, (iii) in other cases render products 
better, cheaper, and vastly more plentiful.* Through 
these advantages, in spite of temporary misfortunes^ 
often occasioned by the introduction of it, machinery 
becomes an inestimably valuable auxiliary to labor in 
creating wealth. 

1 On the difference between tools, instruments, and machines, § 29, n. i. 

2 The first cotton mills in America were driven by horses or oxen. 

^ Partly by the fineness and regularity of their work, as mowers, reapers 
and steam ploughs; partly by sheer power, as in heavy hauling, lifting and 
pumping. Sometimes their force is not beyond what united human effort 
might yield, but has to be applied in a place [a mine, e.g?^ where not 
enough men can 'get hold.' But the earth's population were insufficient 
to do a tith J of the work which machinery now performs. The world's 
horse-pow',r in steam alone aggregated [Mulhall] in 1880, 28,952,000. 
Each ho.se-power being equal to 12 men's power, we have steam doing 
the work of 347,424,000 men. But engines, furnishing power alone, repre- 
sent hjt a small part of the work of machinery. Competent estimates 



68 THE RELATIVE CONDITIONS OF PRODUCTION 

regard machinery as doing in Great Britain alone the work of 700,000,000 
men, a number probably in excess of the entire laboring population of the 
globe. Cf. n. 4. Notice, further, that machinery, like labor [§§ 43, 44], 
gains in efficiency by organization, piece standing in rightly complementary 
relations to piece. 

* A sewing-machine does the work of 12 women. A Boston 'boot- 
maker,' with one workman, makes 300 pairs of boots daily. In 1880, 300 
of these machines were at work in various countries, and turned out 150 
million pairs. Glenn's California reaper will cut, thresh, winnow and bag 
the wheat of 60 acres in 24 hours. The Hercules ditcher removes 750 
cubic yards of clay per hour. The Darlington borer enables one man to 
do the work of 7 in tunnelling, and reduces the cost by two-thirds [Mul- 
hall]. One boy with a knitting machine does as much work as 100 per- 
sons could 100 years ago. 

5 It imbrutes as well as kills off men to do work which constantly tasks 
their physical power to its utmost. Cf. § 35, n. 6. 

^ Capital suffers, as each new piece renders more or less old property 
worthless — a process continually going on. Usually, of course, the new 
gear soon more than recoups this loss. Much sadder is the displacement 
of labor which an important novelty in machinery always effects. Laborers 
no longer young are ruined for life, their hard-earned skill going for noth- 
ing. Even the young suffer painfully. No state has ever yet, as Sir 
James Steuart advocated, sought to make good these losses. Yet after all, 
how mad to prohibit machinery! Nor does it on the whole advantage 
the capitalist more than it does the poor. 



§ 42 Unembodied Invention 

M'Culloch, pt. ii, sec. iv. 

By no means all special ideas, helpful economically, 
thus take form in tools, instruments or machines.^ An 
immense proportion of the most valuable applied science 
does not. We instance : i Chemical information and 
skill in washing, dyeing, tanning and the like.^ ii Geo- 
logical knowledge of leads, layers, etc., used to guide 
mining operations, iii Nearly the whole science of 
engineering in its various departments^ and bra.iches. 



THE RELATIVE CONDITIONS OF PRODUCTION 69 

iv Science as utilized in agriculture, stock-breeding, 

and the propagation of fishes, v That vast body of 
practical maxiius, the growth of its whole past, which 
exists in every department of human industry, touching 
the most efficient conduct thereof. 

^ A weighty truth, which economic writers have too much overlooked. 
Connaissances of this kind really form one of the main departments of 
capital. Observe that what we here discuss is not the same as the intelli- 
gence mentioned in § 36, iv, though the two are closely related. 

2 " Mr. Walter Weldon, chevalier of the Legion of Honor, who died in 
England, Sept. 20, 1S85, was one of the five men, and the only foreigner, 
whom the French Societe d'Encouragement has deemed worthy of its 
grand medal. To him we are indebted for the process by which alone 
bleaching powder is now made. The peroxide of manganese employed to 
liberate chlorine from the hydrochloric acid obtained in the first step of the 
soda manufacture was formerly thrown away. By a very simple process, 
Mr. Weldon recovered from 90 to 95 per cent of the manganese in a form 
available for renewed use, and thus saved nearly £(i on every ton of bleach- 
ing powder made, quadrupled the total manufacture, made the industrial 
world the richer by some three-quarters of a million sterling per annum, 
and as the French chemist, J. R. Dumas, publicly observed, cheapened 
every sheet of paper and every yard of calico made in the world." 

^ Civil, mechanical, electrical, marine, mining. Each has its numerous 
branches. Cf. Annales des Fonts et Chaussces, 1887, 2, p. 389 [on org'n 
of railway train movement in U. S.]; and p. 522 [on use of certain waste 
salts for clearing streets from ice] . 



§ 43 The Organization of Industry 

Marshall, bk. i, chaps, vii, viii. Mangoldt, §§ 28, zg. Roscher, § 56; Ansichten, 
vol. ii. Mill, bk. i, ch. viii. George, Soc. Problems, ch. i. Schoenberg, vol. i, 
203 sqq. 

System is imparted to labor in two ways : I Compo- 
sition, whereby several persons, uniting either contem- 
poraneously^ or successively^ in the same acts, accom- 
plish more than they could singly. II Division, which 



70 THE RELATIVE CONDITIONS OF PRODUCTION 

secures the same advantage by assigning to different 
parties different portions of one and the same greater 
or smaller task. This distribution is partly sponta- 
neous,^ partly the result of conscious purpose. It has 
three phases : i Local,^ each nation or vicinity engaging 
in the industry giving it the greatest relative advan- 
tage as to climate, raw material, markets, etc. ii Gen- 
eric, every several body of producers busied with the 
sort of work best adapted to its powers.^ iii Personal, 
the division of labor in the narrower sense, each individ- 
ual doing the particular thing which he can do most 
easily and perfectly.^ 

1 As in lifting a heavy weight, loading logs, pulling stumps, and other 
jobs for which farmers "change works." In many such cases — we add 
proof-reading to the number — the work could not be done at all except 
co-operatively. In any kind of toil the union of several persons lends a 
peculiar inspiration, which is usually worth taking into account. 

2 As where two or three men hammer the same hot rivet, the better to 
head it ere it cools. Where three [even five may so combine] pound on 
the same drill, division of labor also comes in. The drill goes no faster 
than with the same number of blows from one man, but the holder of it is 
worked to better advantage. See next §. 

3 The local phase, at least so far as it pertains to nations, is mostly spon- 
taneous. It is only minor and specific businesses which they formally 
adopt by legal encouragement. The establishment of quinine production 
in India through the agency of the British government, and of beet-sugar 
production in France, Germany and Austria, are examples. Subordinate 
districts adopt industries much more easily, and often, — now at a loss, 
now to their great benefit. In agriculture, experiment with this in view 
has yet to go much farther. It is not at all to be assumed that the crops 
grown from time immemorial in a given locality, are the only ones suited 
to it. 

* Thus London, Manchester, Liverpool, and the wheat section of Amer- 
ica supplement each other, forming an industrial group, much as do 
foreman, cutters, crimpers, lasters, heelers, etc., in a shoe factory. Cf. 
Roscher, § 57. Europe and Asia co-operate in the same way. More still 



THE RELATIVE CONDITIONS OF PRODUCTION /I 

the Torrid and Temperate Zones. The importance of this international 
division in labor will be shown under Exchange. Tariffville, Conn., was 
found to be superior to Thompsonville as a site for carpet manufacturing, 
because the water there made faster dyes. The special excellence of West 
English cassimeres is said to be due to a peculiar humidity of the air, ren- 
dering the fibre tractable while wrought. 

^ Heredity of industrial tact and taste is as valuable as it is striking. 
English Avoollen spinners and weavers inherit a pronounced adaptability 
for their trade. So the silk workers of France, and the fishermen of Nova 
Scotia. 

•^ This is the form discussed in next §. 



§ 44 The Same in a Special Aspect 

Plato, Rep., bk. ii. Ad. Smith, bk. i, chaps, i, ii [cf. in Playfair's Ed., supp. ch. iii]. 
Roscher, § 58, and the other authh. cited at last §. 

The economic benefits^ springing from the personal 
division of labor are extraordinary* and have been well 
discussed in nearly all the books since Adam Smith. 
They consist in : i Laborers' improved dexterity .^ ii A 
better distribution of abilities-^ among the various de- 
partments of the work, iii Inventiveness and inven- 
tions.* iv Economy of time, employing the least pos- 
sible in changing tools and place, v Prevention of 
waste in stock,^ whether raw material or fixed capital, 
vi Saving of interest^ and insurance. 

1 Ad. Smith's favorite illustration [bk. i, ch. i] is pin-making. It 
involved in his time about iS distinct operations, each, in the best works, 
performed by distinct hands. He estimated that the product by this dis- 
tribution was from 240 to 4800 times as great as if each workman had 
wrought separately and with no special education for the trade. Cf. Perry, 
Elements, 129. 

2 A blacksmith not specially used to nail-making turns out 200-300 a 
day; one used to it, yet with his hand out through other work, 8oo~looo; 
a boy, even, who has never done anything else, 2,300 [Ad. Smith]. Each 
pupil can multiply instances. 



72 THE RELATIVE CONDITIONS OF PRODUCTION 

^ Skilled laborers need be had only for work which they alone can do, 
simpler parts being left to apprentices or green hands. In making needle- 
points children beat adults. 

* Though Arkwright began as a barber, and Cartwright, the inventor of 
the power-loom, was a clergyman, far the larger part of the inventions 
which have blessed the world, were worked out by mechanics. To the 
cunning stored in the steam-engine of to-day, Watt is hardly the thousandth 
part contributor. The rest is mainly from unknown men. 

^ As a rule, waste of material will be small in proportion to the rapidity 
with which it is turned into product. Buildings, machinery, tools, and all 
fixed capital would of course better be worn out in productive use than by 
decay. A mill with never so few hands must have a full complement of 
gear. This is a strong argument for long work hours, and for night work, 
provided orders are heavy enough. 

^ This, as a consideration separate from the preceding, relates to the 
materials used in production. The shorter this process the less time is 
money invested in them and the less time have they to carry insurance. 



§ 45 Evils and Limitations 

Roscher, §§ 59 sqq. Mill, bk. i, ch. viii. Ad. Smith, bk. i, ch. iii. 

The division of labor, carried to such an extreme in 
the monster undertakings of recent decades, has its 
dark side. The workman's Hfe lacks its old diversity .^ 
Narrow, it cannot but be monotonous and irksome. 
The man is more dependent on his single art, possess- 
ing at once less ready knowledge and less ability to 
acquire. In two ways the system favors strikes. By 
making laborers clannisli it fosters union among them, 
while it gives a few power to stop the work of all. For- 
tunately there are activities which only to a limited 
extent allow labor to be divided, the check lying for 
some in the nature of the business,^ for others in a 
contracted market.^ In all trades whatever, organi- 
zation is repressed by lack of capital,^ and ceases to be 



THE RELATIVE CONDITIONS OF PRODUCTION 73 

profitable^ when in compass and complexity it tran- 
scends available superintending ability. 

^ All have heard the proverb that in Lynn, Mass,, centre of the ladies' 
shoes industry for this country, not a shoemaker is to be found. 

2 In agriculture, e.g., the work manifestly cannot be parcelled out 
among ploughmen, herdsmen, reapers, mowers, choppers, etc., but each 
hand has commonly to do more or less at all these. House-building and 
painting in cold latitudes present the same difficulty. Roscher lays down 
the principle that the possibility of dividing labor bears exact proportion 
to the degree in which, in the different kinds of industry, labor contributes 
to production. 

^ Read, best. Ad. Smith, as above. Cabinet-making is intrinsically sus- 
ceptible of great division, yet in a country place no one can live by this 
craft alone. The cabinet-worker must here be carpenter, joiner and wood- 
carver, too. Every country blacksmith is also copper-smith and lock- 
smith. Notice how cheap transportation, by turning many little markets 
into one of large size, makes possible much new division of labor. For- 
merly the furniture, coffins and wagons for every village had to be made 
there, usually by the same man, so meagre was the demand for each. Now 
those wares are carried thousands of miles, and even coffins can be gotten 
up in such numbers under one roof as to admit of the most perfect division 
of abilities. Frontier settlements still show the old order of things. 

* For plant and stock. So far as thorough oversight can be secured, 
there is advantage in large undertakings, even in the industries referred to 
in n. 2, above ; but if this condition fails, smaller establishments, though 
missing many of the advantages which fuller organization would give, will 
lead [Cherbuliez, vol. i, I20 sqq.]. 

^ I.e., ceases to be truly productive. But a trust or ring which has a 
monopoly may, though far too large to be economically managed, and 
hence not a help to general production, still, by raising prices, be very 
profitable for those interested. Cf. § 2i, iv, (2). 



§ 46 The Form of Undertaking 

Cossa, Elementi, II, vi. Mill, bk. i, ch. ix. Weeden, Soc. Law of Labor, 30. Walker, 
P. E., 244. Mangoldt, §§ 33-3S. Schoenherg, vol. i, 220 sqq. Cohn, 447-87. 

Very many goods are produced by the identical per- 
sons or families who are to consume them : numerous 



74 THE RELATIVE CONDITIONS OF PRODUCTION 

others for exchange, but in petty ways. Respecting 
the remainder, intended for exchange on a large scale, 
it is important where, for any given hne or centre of 
production, the sovereign directorship and risk^ are 
located. Their seat may be : i In the state — pubHc 
co-operation. 2 ii In isolated groups or partnerships ^ 
of men, working unitedly and on a level one with 
another — private co-operation, iii In individual un- 
dertakers or contractors — the single entrepreneur sys- 
tem, iv In joint stock companies as undertakers — 
the collective entrepreiieitr system. Each of these is 
useful in special fields ; neither will do for the whole 
range of industry. There are species of production 
which the state must assume, and its function in this 
way enlarges with the growth of civilization.* Co- 
operation works excellently where keenest oversight 
and large, intricate combinations are not indispensable.^ 
Single undertakers secure to the superintendence the 
maximum of diligence and energy, but lack capital 
for colossal works. For these, stock associations are 
best fitted, and the mammoth enterprises of the age 
fall more and more to them. With their endless capital 
they can command the first quality of superintending 
talent, while utilizing to the utmost the division of 
labor. But to this Titan form of undertaking attach 
certain evils : i Irresponsibility of managers to stock- 
holders. 2 Baneful political influence. 3 Tendency 
to monopoly, making their own, and denying to the 
public, the benefits of cheapened production.^ 

1 These being the chief elements in the function of " undertaker," en- 
trepreneur, or middle-man — the man who harnesses labor and capital 
together to the work of production. We second the example of H. C. 



THE RELATIVE CONDITIONS OF PRODUCTION 75 

Adams in effort to restore the word " undertaker " to its good old English 
and American use as the exact equivalent of entrepreneur, Unter7iehmer, 
and imprenditore [Alexander Hamilton, Report on Manufactures]. 'Cap- 
italist' is too indefinite, meaning also, and usually, the owner of capital, 
which the undertaker, as such, is not. See, further, in Part IV. 

2 Which, made general, would be socialism [§§ 14, 37]. 

^ Covering private socialistic and communistic societies, co-operator.; 
and partnerships. A partnership is in essence nothing but a case of co- 
operation, though the two are usually separated. Co-operation is destined 
to enlarge its scope, greatly to the aid of production, but not to become 
the general form of undertaking. Even had it enough capital — it might 
command much — it lacks the concentration of energy and the industrial 
generalship required for enterprises of much magnitude. See § 36, n. 4; 
Marshall, bk. iii, ch. ix; Mill, I, viii; Holyoake, Hist, of Co-op'n; Yves 
Guyot, bk. iv, ch. ix; Walker, Wages, ch. xv; Quar. Jour. Econ., vol. ii, 
210, 446. 

* Professor Wagner has shown this. Lehrlnich, vol. i, §§ 171-178, 

6See§45, n. 5. 



CHAPTER VI 
cost and consumption in production 

§ 47 Metaphysical Cost 

Cairnes, Leading Principles, pt. i, ch. iii. Sidg'wick, 201 sqq. Jevons, Theory, 159 
sq. Macleod, Econ. Philos., 331. Marshall, bk. ii, ch. xiii. Bagehot, Ec. Studies, 
vii. Macvane, Quar. Jour. Econ., vol. i, 481 sqq. 

The real cost of any product consists in the effort 
or sacrifice required to obtain it. ' It represents what 
man parts with in the barter between him and nature.'^ 
Three elements compose it : i Liabor, this being im- 
portant to the result in proportion to i) time, and 
2) intensity, ii Abstinence, this being necessary in 
order to the supply of capital ^ for the support and 
utilization of the labor. Abstinences can be compared 
in the respects of duration and temptation, the latter 
arising from the power, as subjectively viewed, of the 
wealth abstained from to gratify, and in this sense cor- 
responding to the amount^ of that wealth. Labor- 
exertion is more an individual experience than absti- 
nence, which is largely social.^ iii Risk, a hardship 
inseparable from the exercise of either labor or absti- 
nence.* The cost of a product as thus estimated is, 
of course, a highly indefinite notion, and different costs 
are but roughly commensurable.^ Infinite complexity 
is added to the indefiniteness if we attempt to trace 
cost in any case to its original elements ; since the 



COST AND CONSUMPTION IN PRODUCTION J"] 

sacrifice attending this or that piece of production de- 
pends upon the development of man and the arts at 
the time, which in turn depend on an unthinkable series 
of similar sacrifices, reaching back to the beginnings 
of human history. The ultimate cost of any particu- 
lar item of wealth, therefore, wholly defies computation.^ 

1 Cairnes, 57. In this chapter Cairnes shows how superficially Mill 
expounded cost of production by resolving it into wages and profits 
[interest]. Such an analysis is truthful enough from the business man's 
point of view, but does not bring to notice the final consideration which 
society pays for wealth. Comparing the next § with this, one sees how far, 
and how, Cairnes and Mill may be reconciled upon the perplexing topic 
before us. 

^ See § 30, n. 2. Did men use at once the results of all labor, there 
would obviously be no capital. It is harder to see that the abstinence 
demands effort. Yet it does. Witness the poverty of savages, for lack 
of the self-control which this effort requires. Very wealthy persons save 
with a minimum of sacrifice, sometimes, perhaps, with none at all. But in 
society as a whole, wealth cannot be maintained without it. 

^ Macvane, as above, thinks that Cairnes, in asserting abstinence to be 
measurable [in part] by the "quantity of wealth abstained from," defines 
in a circle, since the " quantity of wealth " is gauged by its value, which, 
in turn, depends on cost of production, the very thing which C. is seeking 
to define, and on wages and profits, which, C. declares, are not elements in 
cost. The point is ill taken, as C. means the " amount of w.," only as 
subjectively estimated. But Cairnes, unwilling to let go the conception of 
normal value [see this topic in Part II : cf. n. i, above], does err in repre- 
senting the measurement which is possible here as more definite than it 
can in fact be made. 

* Risk is a separate thing from abstinence. Abstinence would call for 
some exertion even were we absolutely sure of enjoying the fruits of it by 
and by. 

^ Still, Sidgwick notwithstanding, they are commensurable. Even the 
socialists' proposal to reduce hours of skilled labor in its various grades 
to so many more hours of ordinary labor, treating this last as a common 
denominator for all labor, is not absurd in nature, though measurements of 
this sort would be painfully general. 

6 § 27, n. 4. Mill, bk. i, ch. ii, § i. 



78 cost and consumption in production 

§ 48 Mercantile Cost 

Mill, bk. iii, chaps, iv, vi. Also same authh. as at § 47. 

Corresponding 1 in a general way to the metaphysical 
cost of a thing, and furnishing for moderate lengths of 
time a tolerable measure of this, is the expense to which 
a given undertaker is put in producing that thing. 
Such expense may be named the mercantile cost. 
Aside from the relatively minute elements of taxation 
and rent, its components are (i) the wages of the 
necessary labor, and (ii) interest on the necessary capi- 
tal. Either of these two factors remaining constant, 
the mercantile cost of the production in question varies 
closely with the variations of the other, i For wages, 
the actual expense will be determined by i) tlie rate,^ 
as high or low; 2) the material^ used in payment, as 
dear or cheap ; and 3) the efficiency* of the labor, as 
small or great, ii For interest, the outlay will be fixed 
by i) the rate, higher or lower; 2) the period,^ longer 
or shorter, needed for turning the capital into product ; 
and 3) the speed, greater or less, at which the capital 
deteriorates during this process. 

1 The two costs must correspond, for the undertaker has no means of 
securing the production but to give to the laborer on the one hand, and to 
the capitalist on the other, a remuneration sufficient to induce in each the 
needed sacrifice. For the same reason one cost vaguely measures the 
other for any limited period. But, with less and less exactness the longer 
the time, since, as the industrial arts improve, the metaphysical cost is less 
and less in proportion to the total product, while mercantile cost keeps 
pace with product [Cairnes, 49 sq.]. 

2 To see correctly the bearing of these six main factors in mercantile 
cost, it is well to consider each by itself and suppose no change for the 
time in the other five. Thus, provided wage-material, efficiency of labor, 



COST AND CONSUMPTION IN PRODUCTION 79 

rate of interest, turning-period and rapidity of deterioration are the same 
in two different establishments, but the rate of wages the higher in one, 
production will be the costlier in that one. So with every other of the five 
elements. See n. 4, below. 

3 Depreciated paper, silver, gold, or paper at par with silver or with 
gold. The principle holds also if payments are made barter-wise, or in 
products. The pupil will learn in Part III that the standard monetary 
unit itself, whether it be of gold or of silver, can suffer decided variations 
in value. 

* What was said in note 2 does not, of course, assert that low wages 
necessarily imply cheap production, for the effi-cieficy of high-wage labor 
may be and very often is enough greater to render that the cheaper. 

^ The aging of liquors requires in this trade a long investment of capi- 
tal. Old brandy will bring three times as much as new. Whiskey is often 
kept seven or eight years, and is thought to improve constantly through 
even twenty. Manufacturers esteem it a great hardship that they must pay 
the excise on it when three years old, since the aging is in their view part 
of the process of production. The same question (when does production 
end?) arises in respect to certain other articles, e.g., cigars and cheese, 
which improve by mere keeping. But manufacturing in the strictest sense 
varies greatly in time, and that in the same line. To tan a skin is the 
work in France of a year, in the United States of a month. Suppose all 
the other components of cost the same for both countries, French tanning 
is evidently the more expensive, 



§ 49 Consumption 

Mill, 2d Ess. on Unsettled Questions. Patten, in Science Economic Discussion, 123 
sqq. Cherbuliez, bk. i, ch. x. Clark, Philos. of Wealth, ch. iii. Cossa, Ele- 
tnenti, iv. 

i Consumption in Economics is not the destruction 
of matter, but an immaterial process. It relates to 
utility, consisting either in the total or partial annihila- 
tion of this, or in change of its form, ii Consump- 
tion is either destructive, not yielding any advantage, 
direct or indirect, to any one, or economic, which is the 
voluntary destruction of utility for the sake of advan- 



80 COST AND CONSUMPTION IN PRODUCTION 

tage. iii Economic consumption, synonymous with 
use, may be unproductive, destroying utility to secure 
immediate satisfaction of need, or reproductive, the 
utihty reappearing under other forms. Reproductive 
consumption is merely a phase of production ^ itself, 
iv Consumption is not necessarily destructive, or even 
unproductive, because it leaves no tangible or measura- 
ble result. The use of luxuries, intellectual or aesthetic 
entertainment, and the like, may create wealth indi- 
rectly, or a good that is not wealth, but better. 

1 This and waste [§ 50] are the only phases of consumption which it is 
logical to discuss in Part I. The general question of the legitimate final 
destination and fate of wealth we reserve for Part V. 



§ 50 Waste and Thrift 

Mangoldt, § 31. Roscher, § 45. Cherbuliez, bk. i, ch. ix, § i. 

But a vast proportion of consumption is destructive 
in nature, pure, unremunerative •waste,^ the annihilation 
of so much precious wealth, which men must dispense 
with, thus remaining poorer, or re-create with toil and 
pain. Such deficit mainly occurs through either (i) care- 
lessness, or (ii) thriftlessness. To the first cause is 
due much deterioration of animals by overwork, ill 
food, and inattention, much decay of buildings and 
machinery, and fully half of the enormous losses each 
year by fire.^ The second cause, too, contributes to 
the above, yet is chiefly influential in other ways. Liazi- 
ness, intemperance,^ ill choice of dress, food,^ and 
modes of cooking, slovenly tillage, neglect of accounts ^ 
and of little sums,^ may illustrate. The ill results do 



COST AND CONSUMPTION IN PRODUCTION 8 1 

not end with the owners of the wealth that perishes. 
All destructive consumption tends to injure, and nearly 
always does actually injure, the entire public. In the 
aggregate, it is an incalculable detriment to mankind. 
Thrift is promoted less by a liigh rate of interest than 
by (i) morality, (ii) good government, rendering sav- 
ings safe, (iii) strong family ties, prompting parents to 
plan for their children's best, and (iv) a proper distri- 
bution of wealth. Very poor persons cannot save, the 
very rich lack powerful motive for so doing. People of 
middle rank are the great builders of wealth, the more 
when gentle gradations among them stimulate the 
desire to rise. 

1 § 30, n. 3. Let no one suppose this to be waste any the less because 
it may invoke particular new applications of industry. E.g., " the broken 
pane," in Bastiat's illustration, Ess. on P. E. [Putnam's Ed., 72 sq.]. The 
glazier has more work : is not the accident a blessing? Not at all. Sup- 
pose the pane had remained whole. The money which the glazier has 
received would have gone [say] to the shoemaker, whose prosperity is no 
less important to the community than the glazier's, while he who had to 
pay for the pane would be richer by a pair of shoes. Study this till per- 
fectly clear. 

2 Estimated to reach in the entire United States over ^100,000,000 per 
annum, and in New York state alone ^15,000,000, — the latter sum exceed- 
ing by ^6,000,000 the whole burden of taxation for state purposes, and 
being considerably over one-seventh of the annual increase in the state's 
taxable property. It is thought feasible, through increase of precaution, 
to reduce this destruction, national and state, by fully one-half. Fire losses 
to factory property have already been cut down much more than this, viz., 
75 per cent, mainly in ways pointed out by the late Zachariah Allen, 
of Rhode Island, and Edward Atkinson, of Boston. Insurance rates 
have fallen accordingly. It is uncertain whether insurance decreases or 
increases fire losses, but it very helpfully distributes the burden which 
they entail. 

8 § 21, n. 7. 
4 § 16, n. 7. 



82 COST AND CONSUMPTION IN PRODUCTION 

° A very prevalent and unfortunate fault of farmers — worse among 
them than among other industrial classes of like intelligence. 

s In the savings banks of the United States are, in 1889, ^1,200,000,000 
or ^1,400,000,000, almost or quite as much as all the other banking insti- 
tutions of the country contain. A great part of the sum has been deposited 
by persons of quite moderate means. Suppose the whole laboring popu- 
lace to save as these have ! Thrift should be enjoined as a duty. The 
introduction of school savings banks is a worthful reform, and promises 
much. 



ART 



II 



EXCHANGE 

EXCEPT AS INVOLVING THE SCIENCE OF MONEY 

CHAPTER I 

THE NATURE OF EXCHANGE 

§ 51 In Rude Societies 

Laveleye, Primitive Property. Maine, Anc. Law, ch. viii. Schoenberg; vol. i, 27 sqq. 
Hyndman, Hist. Basis of Socialism in Eng., 104, 109. Morgan, ' Montezuma's 
Dinner,' N. A. Rev., Apr., 1876; Ancient Society, pt. ii, ch, vii. 

We have already often had occasion to advert to the 
phenomenon of exchange: it now demands detailed 
study. Exchange is not, as is sometimes taught, a 
strictly necessary feature of economic life.^ Among 
primitive men the distinction of inemn and Uium hardly 
arises. Their property is mostly common,^ their pro- 
duction wholly for their own immediate consumption. 
In the village communities of India, in Polynesia, Aus- 
tralia, and over large parts of Africa may even now be 
seen families and groups of families producing all that 
they consume, and consuming all that they produce, 



84 THE NATURE OF EXCHANGE 

exchange practically unknown.^ Society in ancient 
Mexico and Peru is believed to have been communis- 
tically organized, no exchange being had save trifling 
trade of tribe with tribe and village with village. In 
Eng-land, so late as the fifteenth century, exchange was, 
outside of towns and cities, not indeed absent but 
entirely insignificant* as an economic resource, fam- 
ilies producing for the most part what they themselves 
consumed and no more. It was much the same in the 
American colonies, and so continued in the remoter 
portions of the states till the railway era opened. 
There remain to this day Isolated sections ^ in the 
West and South where the play of exchange is ex- 
tremely limited. 

1 See § I, n. 7. Mill, bk. iii, ch. i, § i, shows that it will not do to take 
excha7tge as the exact correlate of wealth. It is hence both illogical and 
confusing to place an exposition of exchange at the threshold of a course 
in Economics. 

2 See § 3. Maine, Laveleye, Cliffe Leslie and others have proved that 
private property, in land at least, originated in comparatively recent times. 
So far as can be traced, land was among all peoples, at first and for long, 
common property. When severalty-holdings arose they reached only to 
house lots and gardens. Nor was community-property confined to land, 
but extended to all movables as well, with such exceptions as each family's 
clothing and kit of utensils for hunting, fishing and the like. Even in 
these cases property-right was not then regarded absolute. 

^ Contrary to frequent representations, simple division of labor does 
not of necessity involve or imply exchange. Division of labor presents 
itself in every family, exchange rarely. So in Shaker communities. 

* This, too, in an age of prosperity for the common people as great, on 
the whole, as was ever known in England. 

^ Our communistic societies might also be mentioned. But, though no 
exchange goes on within each, they do traffic with the world outside, and 
get gain. 



the nature of exchange 8$ 

§ 52 Philosophy 

Ad. Smith, bk. i, ch. ii. Mangoldt, bk. iii, ch. i. Cherbuliez, bk. ii, ch. i. 

Yet exchange is natural, in the same sense as are 
development and civilization. i Different human ^ 
beings possess tastes and aptitudes for different pur- 
suits, nearly every individual having a peculiar fitness 
for some one line of production, his efforts most avail- 
ing if confined to that single line. The talent may be 
original, acquired, or partly either, ii The environ- 
ments of men are about equally various,^ fixed so in the 
very constitution of the earth, and these affect their 
producing power much as their unlike abilities do. 
iii At the same time each man has the capacity and 
desire to enjoy all or nearly all sorts of products, and 
will enjoy them if he can obtain them.^ iv From these 
multitudinous needs of men, coupled with the extreme 
diversity in the advantages which they possess rela- 
tively to each other, springs exchange, whereby one, 
with his special product or kind of products, purchases 
for the satisfaction of his own numerous desires, the 
various products of his fellows. The process extends 
its scope* according as wealth, culture, needs, the 
division of lahor, and man's mastery of the earth 
increase. 

1 Adam Smith, as above, places exchange among the marks which 
especially differentiate man from the brute. He and others have raised 
the question whether or not there is innate in man a specific propensity 
to exchange. None pertains to the race as such. The tendency is 
acquired — a growth consequent upon the great good which exchange 
confers on society. I.e., people would not long exchange did they not 
find their account in it. 



S6 THE NATURE OF EXCHANGE 

2 One man lives near a prolific gold mine, a second where cattle are 
fattened for the tending, a third where valuable game is easily taken, a 
fourth by fine waterfalls or rich coal beds, tempting to manufacture, a fifth 
on the seashore, catching fish enough in a day to feed a hundred people, 
a sixth owns a fertile farm, and so on. 

3 The tendency is : specialty in production, universality in consumption. 
But for exchange, here would be a fatal fracture in the frame of society. 

* Cf. § 54. 



§ 53 Intrinsic Advantages 

Mattgoldt, blc iii, chaps, i, ii. Cherbuliez, bk. ii, ch. vii. Perry, ch. iv. 

Suppose that a tailor can make a coat in one day, a 
hat only in six days, and that a hatter can make a hat 
in one day, a coat only in six. Without exchanging, 
each must work seven days for a hat and a coat. By 
exchanging, each can obtain both articles for two days' 
work, and wealth will g-ain five coats and five hats. 
Such saving is the tendency of all spontaneous ex- 
change. This illustration teaches that : i There is no nec- 
essary reason why, in any exchange, both parties should 
not g-ain. If the contract is intelligently and freely 
made, both do gain.^ ii The greater the diversity of 
relative advantage between the parties, the greater the 
profit of exchanging. Thus every man's special for- 
tune, skill, talent, or felicity of situation is through 
exchange a benefit to the public^ in spite of him. 
iii Any abridgment to liberty of exchange, whether 
between persons, sections or nations, must, at least in 
the first instance, inevitably produce loss. Whether 
the hindrance can in this or that case prevent greater 
loss, or set in train compensating causes, is often an 
important question.^ 



THE NATURE OF EXCHANGE 8/ 

1 Take the men supposed at § 52, n. 2. Confine each to the direct 
fruit of his own toil, and, however diligent they are, all suffer from poverty. 
Let them exchange, and every one of them will better his condition a 
hundred fold without an additional stroke of labor. They can well afford 
to pay the merchant and the teamster who mediate the transfer. 

Even if you are unfortunate, and in this sense compelled to buy or sell, 
your act is best for you under the circumstances. How is it in stock 
gambling? Here, too, the law holds, since, in a very true sense, the con- 
tract is blindly made. 

2 A fine illustration of the benevolence wrought by Nature into our very 
constitution. Cases are meant, of course, where the advantage has not 
been won at any one's expense. We may mention here the super-economic 
blessings : religious, moral, sesthetic, intellectual, which attend exchange — 
the broadening of men's horizon, aid to Christian missions, prevention of 
war, national and international charity in famines and pestilences. Com- 
merce is the prince of civilizers. 

3 In some instances to be answered affirmatively, in others negatively. 



§ 54 Reach of Influence 

Mangoldt, as at last §. Roscher, § 8g; Nationalok. d. Ackerbaues, EM. Cher- 
buliez, bk. ii, ch. v. 

With the progress of exchange the entire face of 
the economic world becomes transformed, while civ- 
ilization 1 attains a loftier level and a richer diversity. 
i A special class of merchants or middlemen arises, 
whose contribution ^ to social weal consists exclusively 
in furthering the necessary exchanges between original 
producers and final consumers, ii Communities and 
classes ascertain their fittest places in the nation's 
economy, nations theirs in that of the world, iii Not 
only is production ^ immensely increased in the aggre- 
gate, and still more relatively to effort, but much of 
it takes place in mammoth establishments, correspond- 
ing to the enlarg-ed markets, entailing division of 
labor* with its good and its evil accompaniments. 



88 THE NATURE OF EXCHANGE 

iv Increasingly vast grows the mass of goods which 
are produced for exchange. In tendency thus to seek 
consumption indirectly, articles vary greatly, according 
to, i) acquaintance of peoples with peoples and sec- 
tions with sections, 2) the desire, both intensive and 
extensive,^ of parties for each other's wares, 3) the 
quality of these as preservable or perishable,^ 4) their 
size and weight,''' 5) the presence or absence of the 
necessary means of exchange or of transportation 
and of social and legal restrictions thereto, v New 
modes of communication and transportation are 
called for and developed, which radically change the 
distribution of manufacturing and commercial ^ centres. 
The proportion of urban to rural population mightily 
swells.^ Great cities rise, and, efhcient political admin- 
istration being now possible on a grander scale, petty- 
states give way to those of the colossal order. ^^ 



1 As a single illustration, the complicated instruments for scientific 
investigation could neither be made by their users nor used by their makers. 
The susceptibility of a nation's wealth, as a whole, to be passed from hand 
to hand gauges the grade of culture [England and Russia]. Species of 
wealth vary quite remarkably in this. Cf. notes 6 and 7, below. 

2 I.e., their work as producers, for normal exchange is an act of pro- 
duction. See § 18, n. 2, § 20, vi, and n. 4. Enough of these mediators 
is important, too many a loss. They tend to multiply unduly, an evil 
analogous to overproduction. 

3 Fresh facilities for exchange quicken production, this reacts upon 
those, and so on, each cause ceaselessly and in ten thousand ways influenc- 
ing the other. 

* See §§ 43, 44, 45. 

^ A person, a locality, a country, may need but little of another's com- 
modity, yet need that little very much [as quinine]. Or the need may 
have wide incidence, yet be little urgent [luxuries]. Regularity of de- 
mand is an important consideration. 



THE NATURE OF EXCHANGE 



89 



6 With progress in the arts of preserving and handling, many products, 
as ice, milk, fruit, fresh fish and meat, are at present open to far exchanges, 
which once were not so. There is progress in these processes year by 
year [strawberries, oysters, clams]. There are regular shipments of fresh 
game from St. Petersburg to Paris, arriving in from three to five days. 
Articles of food as a class decay quicker than other categories of wealth. 

^ Roads, docks, most buildings, also certain cumbrous pieces of machin- 
ery, have to be constructed where wanted. Heavy wares, lead, iron, cop- 
per, are carried only with great expense. In many such cases the mobility 
is considerable and on the increase. Houses are gotten up in parts and 
shipped afar. So water and drive wheels of largest sizes. Pig iron, cop- 
per and lead, steel rails, ties and beams cross oceans and continents. But 
all this costs. 

8 Nearly all the largest cities are still accessible to heavy shipping. 
BerUn, however, [1,315,297 inhab.], is not, and a large and growing 
number of cities of the second rank, as Manchester and Birmingham, Eng., 
are not. 

^ In the United States, the percentage of urban [dwellers in cities of 
8000 or over] to total population has increased as follows : 



1790 


3-3 


1840 


8.S 


In the 50 largest American cities in 1880, 


1800 


3-9 


1850 


12-5 


43 per cent of the workers were en- 


I8IO 


4.9 


i860 


16.1 


gaged in manufacturing and mechanical 


1820 


4.9 


1870 


20.9 


industry, 24 per cent in trade and trans- 


1830 


6.7 


1880 


22.5 


portation. 



In England the percentage of people in cities of 20,000 or over was 
51 in 1851, 54.5 in 1861, 56.8 in 1871, and 59.6 in 1881. England and 
"Wales in 1881 had 66.6 per cent of their population in places contain- 
ing 3000 or more inhabitants. Further on thjs, Smith [R. M.], Statistics 
and Economics, 28 sqq. 

^^ Roads gave the Roman empire such eternity as it had. It is nearly 
certain that but for railway and telegraph the United States could not have 
continued till now a single nation. Significant that before 1870 no solid 
general government ever existed in Germany, nor, after Justinian, in Italy. 
Every nation of first rank has since 1850 either extended or strengthened 
its sovereignty, or both. 



90 the nature of exchange 

§ 55 The Perfection of Exchange 

Mangoldt, §§ 43 sqq. Schoenherg, vol. i, VII-X. 

Exchange becomes freer and more complete in pro- 
portion to improvements in : i Means of preserving 
perishable goods.^ ii Facilities for transporting intel- 
ligence, persons, and freight.^ iii Institutions which 
bring would-be Ibuyers and sellers together, such as 
fairs,^ market seasons,* market cities or towns, market 
places in the same, exchanges, stores, shops, travelling 
salesmen, international expositions, and the like. iv 
Weiglits and measures, wherein accuracy,^ simplicity,^ 
and universality'^ are the foremost desiderata, v The 
mobilizing of property, by stocks, bonds, certificates,^ 
or other titles, vi Money and the system of credit.^ 
vii Knowledge,^^ commercial legislation and adminis- 
tration, international law ^^ and comity. 

1 See § 54, n. 6. 

2 See § 54, n. 7. Telegraph and telephone have immensely cheapened 
production by rendering it unnecessary for retailers or ordinary wholesalers 
to keep so extensive stocks as formerly. 

3 Traffic was the original purpose of fairs, and still remains that of the 
great fairs at Leipzig. 

* Certain hours of the day, certain days of the week or month. It 
marks an advance when any commodity, not having previously been so, 
is regularly on sale in a given locality. 

^ Absolute accuracy is unattainable, yet modern standards are incom- 
parably more exact than those prevalent so recently as two centuries ago. 
See ' Weights and Measures ' in Am. Cyclop, and in Encyc. Brit., also 
Jolly, in Schoenberg. An Act of Parliament, July 30, 1855, decreed 
" That the straight line between the centres of the transverse lines in the 
2 gold plugs in the bronze bar deposited in the office of the Exchequer 
shall be the genuine standard yard at 62° F." The U. S. yard is supposed 
to accord with the above, but is in fact about xoVo ^^ ^'^ vach longer. 
Practically, the metric basis, too, must vary with places. Ordinary instru- 



THE NATURE OF EXCHANGE 9 1 

ments for weighing and measuring, ill made and roughly used, betray 
great discrepancies. 

•5 The metric system, with binary modifications for small dealings, is 
far the best yet devised. The Dutch savant, van Swinden, working for the 
French Academy, originated the idea of it, and the system was incorpo- 
rated into French law in 1795. All other civilized nations have since 
adopted it save Great Britain and its colonies, the U. S., Russia, Denmark, 
and Switzerland. 

"^ According to Kolb, cited by Mangoldt, there were in Europe at the 
end of the last century, more than 400 different pounds, and in the Grand 
Duchy of Baden alone, so late as 1S22, 112 different yards. What an 
obstruction to trade ! The metric system ought to become universal. 

* By the ' pipe line certificates,' which are simply warrants or titles to 
so many barrels of crude petroleum, oil is traded in, used for collateral, 
etc., as freely as bonds, stocks, or bank-notes. The system is now ex- 
tended to pig iron, and will probably be to all other commodities durable 
in nature and susceptible of division into permanently fi.xed amounts. 

^ See in Part III. Well-made and full-weight coins, paper at par here- 
with, monetary units having stable purchasing power, sound and widely- 
developed banking and clearing systems — all are needed. Helpful to 
international trade are established and familiar banking relations between 
different lands, the trustworthiness of stamps, labels and the like. A later 
age will see world-money and the international currency of personal checks. 

I'' Cf. § 54, iv. International expositions [Philada., 1876; Paris, 1889] 
doubtless have vast commercial value, informing nations about each other's 
products. 

^1 Chief reference is to private international law, to the facile collection 
by private parties of debts due abroad. The industrial importance of this 
has been too little observed. 



CHAPTER II 

INTERNATIONAL EXCHANGE 

§ 56 Initial View 

Mill, bk. ill, ch. xvii. Cairnes, Leading Principles, pt. iii, ch. iv. Perry, chaps, xiii, 
xivi Ad. Smith, bk. iv. Bastable, Theo. of Intl. Trade. Gill, Free Trade. 
Sonters, ' Exchange/ in Encyc. Brit. 

[Nations as well as individuals have diversities of 
relative advantage, so that, prima facie, international 
exchange offers all the economic benefits of personal 
and domestic/ on a far grander scale. Such an im- 
pression is confirmed by the following considerations : 
i Were there no mutual profit in international ex- 
change, it would cease, ii Should nations undertake 
to produce at home the things which they import, 
effort would obviously be wasted, iii Since the gain 
from international trade depends on the relative cost 
of the things exchanged, and not on the absolute cost 
of either, the traffic may be profitable though the im- 
ported ware could have been produced at home more 
cheaply.^ iv The commodity exports and imports be- 
tween any country and the rest of the world, must, in 
the long run, pay for each other, gold and silver being 
used but rarely.^ v As wealth from abroad can be 
gotten only by the provision of a domestic surplus, 
foreign trade enlarges domestic industry instead of les- 
sening it. vi Yet the great advantage of this trade 
resides not in mere extra bulk of goods produced for 



INTERNATIONAL EXCHANGE 93 

export, but in the nature of the imports, since in these 
each nation reaps some of the benefits which flow from 
the peculiar advantages enjoyed by the nations with 
which it trades.'^ vii A nation having every incentive 
to send abroad its cheapest products, those, namely, in 
the creation of which it has the greatest advantage over 
others, commerce is a sovereign agent in cheapening 
production, viii The benefits of exchange between 
nations cannot be confined to any class or section,^ but 
reach all consumers, the poor, if anything, more help- 
fully than the rich. 

1 See §§ 52, 53, 54, and notes. Walker, P. E., 468 [n. fr. Sumner]. 

2 No anomaly, impossible as it may seem and rarely as it may occur. 
The loss on the import over what it would have cost at home may be met 
and much more by the extraordinary price realized on the export. "The 
ship would return in ballast." Not necessarily. Captains often pay for 
the privilege of bringing iron or tin from England, as cheaper than to 
purchase ballast, the diminution of freight thus secured sometimes out- 
weighing the American duty. 

3 No nation could long send money abroad in payment for imports. A 
very short continuance of the process would so deplete the stock of money 
as to lower prices, inviting buyers from abroad. They would of course 
bring money, and the former supply would reappear. Should a country 
begin exporting for money only, the reverse phenomena would have place. 

* Fawcett, Manual, 386. 

^ True, even when free competition in importing is not permitted. Faw- 
cett, Manual, 379. If any given import becomes monopolized, as by an 
international trust, the distribution of advantages will of course be so far 
rendered imperfect, just as in case of domestic monopolies. The importer, 
that is, or the set of importers, will retain an undue share of the gain. 
But not all can be so kept. 



94 INTERNATIONAL EXCHANGE 



§ 57 Common Ground 

Mill, bk. V, ch. x, § i. Roberts, Government Revenue. Roscher [Eng. Tr.], App. II. 
George, Protection or F. Trade. Gill, and Bastable, as at § 56. 

Nearly all economic thinkers admit/ on the one hand, 
that : i A nation may sometimes with advantage re- 
strict purchases ^ by its citizens abroad i) to diversify 
its own industry, 2) as a provision for foreign Trar, to 
force the domestic creation of war material, or 3) in 
the way of commercial retorsion.^ ii Tariffs for reve- 
nue* are leg-itimate and convenient, and withal as just 
as any form of indirect taxation can be. iii Theoreti- 
cally ' it may be advantageous to encourage by legisla- 
tion a branch of industry which might be profitably 
carried on, which is therefore sure to be carried on 
eventually, but whose rise is prevented for the time 
being by artificial or accidental causes.' ^ iv Particular 
men, trades, and localities often profit largely from re- 
strictive measures. Few will deny, on the other hand, 
that : V Commerce, involving wide acquaintance of 
nations Tvitli nations through their interchange of 
services and productions, is a prime civilizer,^ greatly 
lessening the danger of wars and famines, and dissemi- 
nating infinite moral and religious good, vi A policy 
of restriction cannot possibly be entered upon, altered, 
or given up, without visiting considerable hardship 
upon certain individuals, classes, or sections.'^ vii In- 
tro-national free trade is a priceless blessing, as inter- 
national is destined to become in the course of time.^ 

1 Still another point on which probably all would agree is that men- 
tioned at end of § 60. " Compensating duties," too, on imports the same 



INTERNATIONAL EXCHANGE 95 

in kind with articles bearing excises [internal taxes], if not unduly high, 
no one would condemn [Ad. Smith, bk. iv, ch. ii]. 

2 By duties on imports or by the absolute prohibition of them. This 
puts up the prices of the things thus taxed, and induces domestic produc- 
tion. See § 58. 

^ High duties, or prohibition, in revenge for the like by some other 
nation to the disadvantage of yours. 

* Perry, 427. Loxu and practically inappreciable duties, on few articles, 
not produced at home. So-called protective duties, on the contrary, must 
of course cover home products, while the higher they are, the better, as a 
rule, they fulfil their office. They may easily be so elevated as to yield 
the government no income at all, smuggling [Blanqui, ch. xxvii], false 
invoices [Lond. Times, Mch. 21, '84], and other dishonesty in merchants 
being among the reasons. If the revenue on articles not produced in the 
country is insufficient without making rates too high, some imports the 
same in kind with things created at home may also be dutied, an excise 
equal to the duty being laid on the domestic production to prevent unfair 
favor to home producers thereof. The system so sketched is Great Britain's 
and New South Wales's. Ancient customs systems were for revenue, not 
restriction. Carthage exacted tolls both at home and at provincial ports. 
Rawlinson, Man. of Anc. Hist., 80. Athens in t. of Pericles, had a 2 per 
cent duty on both exports and imports, besides harbor dues of I per cent, 
lb., 178. Cf. Thucydides, II, 38. Egypt under the Ptolemies, Rawl., 232. 
Obviously, taxes thus raised are paid alone by the users of the articles 
taxed. In strictness this is unjust, all admit. H. George and his follow- 
ers, besides a considerable party in England, therefore repudiate revenue 
duties along with all indirect taxes, advocating direct taxation as alone 
admissible. Revenues are by no means large in proportion as duties are 
high. Rather does the proportion tend to be an inverse one. The rates 
of U. S. import duties were about doubled in 1812 with no increase of 
income. 

^ Taussig. To illustrate, Maryland, about 1670, would have done well 
to protect cereals. Tobacco was so high that all attention was devoted to 
it, so that some years colonists were in danger of starvation. Winsor, 
Narr. and Grit. Hist., vol. iii, 543. " But from the difficulty of securing 
in any actual government sufficient wisdom, strength and singleness of aim 
to withdraw protection inexorably so soon as the public interests require, 
it is practically best for a statesman to adhere to the broad and simple rule 
of taxation for revenue only " [Sidgwick]. A good general precept at 
least. Cf. post, § 59, n. i, also Bastable, Intl. Trade, ch. ix, Cairnes, 
Leading Prin., 403, n, and George, Social Problems, 231. 



96 INTERNATIONAL EXCHANGE 

6 Cf. § 53, n. 2. Another consideration of this moral order is the loss, 
beggary sometimes, which one nation's restriction inflicts upon another's 
citizens. On the constitutional c^esi\on [in U. S.], 'F. Trade,' in Lalor; 
Cooley, Const. Law, 57; Ihering, Geist d. r'dm. Rechtes, I, 7. 

"* There must be more or less discrimination between industries, involv- 
ing them often in great mutual hostility. Ad. Smith, bk. iv, ch. ii. Any 
bar upon commerce of course tends to destroy the business of ship-builders 
and sailors. Wells, Our Merchant Marine. 

^ Even Professor Thompson says this. The freedom will be safe, that 
is, so soon as the same fraternity and substantial economic equality come to 
prevail between nations which now subsist between the parts of each. 
Only a few advocates of perpetual trade isolation still remain. On Fichte's 
" Exclusive State," Adamson's Fichte, 76. Max Wirth, on H. C. Carey's 
Prot. Theo., Vierteljahrsch. f. Volkswirtsckaft, 1863, vol. ii. 



§ 58 The Theory of Nutrient Restriction 

Denslow, Prin. of Ec. Philos., chaps, xiv, xv. Thompso7i, Elements of Pol. Econ.; 
'Protection,' in Encyc. Brit. [Stoddart's ed.: full restrictionist bibliog.]. Rogers, 
' Free Trade,' ibid. Laitghliii, ed. of Mill, 677. Wells, ' Free Trade,' in Lalor. 
de Molinari, ' Protection,' ibid. Stimuef, Protectionism. Fawcett, F. Trade and 
Protection. Bastable, chaps, viii, ix. Patten, Prem. of P. E., vii. [Best list of 
works pro and con is in Rob. Clarke and Co.'s Catal. of Wks. on P. E., Cinn., 1888.] 

There are those who believe in the legal limitation ^ 

of foreign commerce not merely as a prophylactic, a 
stimulant, or a tonic, but as a highly beneficial form 
of industrial nutriment, supposing it to give the body 
politic flesh and blood not indirectly alone but as an 
instant consequence, at the very moment of its astrin- 
gent efficiency, and about in proportion thereto. The 
error of this view appears when one reflects that it is 
absolutely impossible for the required check on impor- 
tation to take effect save at the public expense, by a 
rise in price ^ through the whole line of goods affected, 
whether produced at home or imported. Actual restric- 
tion, therefore, so long as it lasts, could not but involve 
net loss, swelling the cost at which the nation supplied 



INTERNATIONAL EXCHANGE 97 

its wants, and retarding production by the transfer 
of effort from more to less efficient lines. Should 
a business previously sheltered at any time begin to 
yield average profits without the aid from society,^ that 
very fact would be proof that it had oiitgi'own its need 
of legislative fostering. Nor does restriction have a 
happier effect on the distribution of wealth than on 
its production.'^ 

J It is well to avoid so far as possible the terms ' protection,' ' protec- 
tive,' etc., because of their ambiguity. Scientific discussion with them is 
impossible. Besides the form of restriction canvassed in this §, each of 
the three mentioned in § 57, i, is known as 'protection.' To dub a policy 
' protective ' settles nothing. The very question at issue is. What policy 
bids fair to be on the whole most ' protective ' ? 

2 Efficient restriction must raise prices. In no other way can it become 
efficient. Nor is the loss on what a man buys made up by the higher 
prices of what he has to sell. The result is, during the actual incidence 
and working of the restriction, an increase in the total amount of effort 
put forth by the nation for its total product, or else the loss of a part of 
that product [Cairnes, Leading Prin., pt. iv, ch. iv]. 

3 I.e., still pay, yet sell at rates as low as free foreign competition would 
fix. The restrictive law might remain but would be a dead letter as to the 
given species of goods. Notice that the mere tariff rate on an article does 
not show whether, or, if so, how much, the duty raises the price of the 
article. It may not affect the price at all, in which case it is nominal only; 
or it may raise the price by the full amount of the rate. The continuance 
of importations in any sort of goods proves that prices have been elevated 
by the full figure of the actual ' protection.' If a duty is prohibitive, the 
elevation may fall much below the tariff figure. 

* If it did, this fact might justify the policy even though the nation were 
poorer thereby. Feudalists and socialists are v/ont to allege that freedom 
of commerce would crush out the middle class, leaving only millionnaires 
and proletaries. French Revolutionary history and policy disproved this, 
von Sybel, French Rev., I, 24. 



98 INTERNATIONAL EXCHANGE 



§ 59 Continuation 

See the authh. at § 58, esp. Sutnner. Prince-Smith, 'Handels/reiheit,' in Rentzsch's 
Handworterbuck. 

The same conclusion is reached if we consider the 
various ways in which restriction has by different 
writers been thought to effect its end. i Liowering- 
prices.! ii Increasing or condensing population.^ 
iii Inviting- in foreign capital. Results i and ii are 
possible at best only after loss of capital and lapse of 
time, which refers them to § 57 : iii can ensue sooner. 
But though in each of these cases net gain may conceiv- 
ably be realized at last, it can never in any of them be 
proved beforehand that this will result, or afterwards 
that it has resulted.^ iv Raising wages. This can 
occur, if at all, only as an incident of general industrial 
prosperity, and will not attend even this if immigration 
is free.* v Keeping at home exchange-profits w^hich 
else would go abroad. But the existence of a desire 
to exchange abroad makes it certain that legal restraint 
could not but lessen the number or the profit of the 
total exchanges, or both.^ vi Making foreigners pay 
part of our taxes. This would be unjust were it pos- 
sible, but it is not. To impose or raise duties certainly 
decreases foreigners' profits from trade with you, but 
does not force from them the slightest positive tribute.^ 

1 This may be i) temporary, a consequence of ruinous competition, 
involving depletion of aggregate wealth, or ii) permanent. The latter 
might arise through protection to young industries [§ 57, iii]. Or strug- 
gling manufactories some time in existence might be enabled to cheapen 
their line of product by a larger market [above, ii]. In any case loss 
would have to be incurred, which no one could ever so measure as to 
certify that it was less than the gain, though it might possibly be. Of 



INTERNATIONAL X.XCHANGE 99 

course cheapness may accompany ox follow restriction without being caused 
thereby. 

2 In new countries population may be too thin for the utmost efficiency 
of its total labor [Mill, bk. i, ch. viii, § 3]. The thought is that it can, by 
legal measures, costly at first, which nurse manufacturing, be thickened 
from abroad, or, without this, assembled in towns and villages, so as to 
produce more per capita, and presently, casting aside protection, to defy 
foreign competition even in the articles at first imported. Free-traders too 
much ignore the possibility of this, restrictionists its uncertainty, costliness 
and practical difficulties. 

^ Many chances for loss would be about certain to be overlooked, 
among them the impoverishment of customer-nations and the limitation 
of market for unprotected industries. Lalor, vol. ii, 303. 

* See § 60, 3. If immigration is unhindered, foreign laborers are in 
competition with domestic, forcing wages down toward the lowest level 
abroad. If it is prevented, the wages question depends for answer on 
the propriety of the restrictive policy at large. 

^ If you forbid a man who wishes to do so to trade across the line, it 
is conceivable that he may effect the desired exchange with equal profit 
at home, his home customer's gain being a clear increment to the nation's 
wealth in consequence of the hindrance. But it is perfectly certain that 
this would not be the case once in a hundred times [Ad. Smith, bk. iv, 
ch. iii]. In arguing from such mere possibilities, restrictionists are often 
worse doctrinaires than their opponents. 

^ Sumner, [London] Economist, Dec. I, '83; Protectionism, 149; Sidg- 
wick, 491 sqq. Full canvass of the proposition is too long for this place. 
Only transitory and highly improbable conditions can be conceived in which 
the nation would get in revenue as much as its citizens lost in advanced 
prices. 

§ 60 Important Specific Points 

i Way land, P. E., 140. Perry, 460 sqq. Taussig, Prot. to Young Industries, 60, 64; 
Pres. Tariff, 90. Fawcett, F. Trade and Prot., chap, ii, pp. 9, 28. ii Fawcett, 
Manual, 390. Farrer, Free T. vs. Fair ['85]. Giffen, Contemp. Rev., June, '85. 
Westm. Rev. , Feb., '88. Ad. Smiih,\iV.\\,c}c\.\\. \\\ Faivceti,Wsxi.,-i%(i. Walker, 
Wages, 44; P. E., 470. iv Andrews, Quar. Jour. Econ., Jan., '89. 

i Bounties ^ offer a more economical means of en- 
couraging industry than duties, as by them i) prices 
are not advanced, 2) smuggling is not induced, 3) the 



100 INTERNATIONAL EXCHANGE 

country is burdened only for the actual production 
secured, and 4) all the cost is borne at home, ii * Fair 

trade' is the cry of a party ^ in England, who spe- 
ciously plead that, while they would be quite willing to 
forego restriction if other nations would, free trade is 
ruinous save on this condition of reciprocity. But for 
a nation to lay tariff upon imports does not remedy, it 
aggravates instead, the loss suffered in the taxation of 
its exports by other nations. Offending peoples are 
punished, but the chief penalty takes effect at home. 
iii Though lowering of wages may not spring from the 
mere fact of using foreign labor, since free importation 
does not employ that to the exclusion of domestic,^ may 
it not ensue if wages abroad are lower than at home ? 
Never, wages in general,* and not necessarily wages in 
the trades in question, since lower nominal, or even 
lower real, wages abroad do not imply smaller cost of 
labor there. And even in industries where whole cost 
of labor is less abroad, home laborers have nothing to 
fear from foreign competition, provided this disadvan- 
tage is offset, as is often the case, by advantages.^ 
iv Contrary to free-traders' usual statement, it is in 
certain cases possible for a trade combination in one 
country to crush competitors in another so as then to 
put up prices, or for an international trust so to con- 
trol prices as to render the customs laws of all coun- 
tries nugatory. Such results bid fair to be henceforth 
more and more common, perhaps the rule, that regu- 
lation of trade hitherto accomplished by nations sepa- 
rately, through tariffs, necessarily becoming matter for 
international compacts. Meantime, while free inter- 
national competition is commonly one valuable safe- 



INTERNATIONAL EXCHANGE lOI 

guard against these syndicates, yet where one of them 
belonging to a given country oppresses a foreign land, 
the latter may well defend itself by a tariff. 

^ Alex. Hamilton in his famous Report on Manufactures, to the Ilnd 
Congress, Dec. 25, 1791, favored bounties as against customs duties. 
Schouler's U. S., vol. i, 187. In 1885, some 270,000,000 lbs. of sugar 
were produced in the U. S., about 10 per cent of the consumption. 
Average cost price not far from 2^ cts., average duty [encouragement] 
nearly the same. I.e., we paid 2} cents on each of the entire 2,700,000,000 
lbs., conferring a protection equally well secured by a bounty of the same 
height on one-tenth that number of lbs. — a loss, so far as protection was 
concerned, of $60,750,000. It might, of course, have been needed for 
revenue, but as a matter of fact was not. 

^ ' Reciprocitarians,' Giffen calls them. Even when retorsion [§ 57, i, 
3)] is desirable, it is a costly process. 

3 See § 56, V. 

* Save in the barely conceivable ways allowed in § 59- 

s Cf. § 48, and n. 4. Roscher [Eng. tr.], vol. i, 218, n. Distinguish 
the 2 cases, i) high efficiency to labor, keeping pace with high wages, so 
that cost of labor is as low as with smaller wages, or lower ; and ii) high 
labor cost, compensated by specially favorable conditions of production in 
other respects, so that whole cost of production is no greater. Agricul- 
tural wages are higher in Australia and the U. S. than in Europe, owing to 
the advantages of rich and low-priced lands. Through cheapness of grain, 
whiskey is manufactured in the U. S. so as to undersell foreign distillers 
all over the world, though labor here, no more efficient, is paid 50 per cent 
higher. Eng. factory hands, with their greater skill, better climate and 
machinery, defy competition from the protected ' pauper labor ' of the 
continent. " India, where the cotton spinner gets only 20 pence a week, is 
flooded by the cottons of England, where the spinner receives 20 shillings" 
[Walker]. Thomas' Hist, of Pennsylvania, 1698, p. 9, says, " Poor people, 
both men and women, will get near 3 times more wages for their labor in 
this country than they can earn in either England or Wales." Of course 
America had no protection then. Hamilton's Report [n. i, above], giving 
a long list of industries already established in America, notes the then 
exceedingly high rate of American wages, and well argues that that need 
be no bar to successful competition with Europe. 



CHAPTER III 

VALUE: GENERAL 

§ 6i Value and Value 

Roscher, §§ 4, 5. Clark, Philos. of Wealth, ch. v. Dttbos, Theo. de Valeur, Jour, 
des Econ., Mch., 1888 [cf. ib., Sep. and Nov., '82, Ap., '83]. Mill, bk. iii, ch. vi. 
Knies, Geld, i. Rae, Contemp. Socialism, 156. Sharling, in Conrad's Jahrb., 
Mch., '88. Martello, La Moneta, App. Wolf, in Zeitsch.f. gesam. Staaisw., 42, 
Heft 3. Marshall, in Quar. Jour. Ecoil., vol. i, 227, 359. Cairnes, Contemp. Rev., 
'76; Leading Prin., pt. i. Courcelle-Seneuil, four, des £cou., Ap., 1883. 

The term value bears both in popular and in eco- 
nomic speech three meanings, which must be carefully 
distinguished : i Utility in general, the power, what- 
ever its origin, of satisfying human needs.^ ii Value 
in use, economic value proper, the useful character ^ 
of things which are actually utilized, however this is 
estimated, and whether they are destined for exchange 
or not : in still other phrase, the immediate significance 
which things possess for men's economic life, iii Value 
in exchange, the ratio at which commodities and ser- 
vices pass for one another in open market. The second 
kind of value is nearly identical with the wealth-char- 
acter of things ; usually, therefore, not originating gra- 
tuitously, though it may also attach to entities, like land 
proper, which are not wealth. The third form of value 
is closely related to the second, being the resultant of 
more or less numerous estimates placed by human minds 
on the relative use-values of things. Values of varieties 
ii and iii hence correspond in a general way, though by 



VALUE 103 

no means exactly. In practical exchange, we obviously 
have to do mainly with value in the third sense,^ but 
this can be properly grasped only by a patient analysis 

of value in the second. 

1 Air and water in general have this. It were better not to use ' value ' 
to name the idea, but only ' utility.' Ever since Adam Smith it has been 
common to identify senses i and ii. Clearly a confusion, since the mere 
power to serve us [potential service] is not the same as actual service, or 
being "in use." The portions which we [by effort] approp7'iate have 
more than utility, viz., value in use. 

2 See § I, and n. 6, also § 62. Whatever is wealth has this value, of 
course. The other things which possess it are very few [§ 28, and n. 3]. 

^ It is in this sense, and in this only, that 

" The value of a thing. 
Is just as much as it will bring" [Butler]. Exchange- 
value is manifestly in no sense intrinsic [§ 62, n. i]. It is not a property 
of all wealth [yet see § l, and n. 7; § 51, and n. i], but only of such as 
can be exchanged [§ 63], and reaches beyond wealth just as value in use 
does [last note]. 

§ 62 Value in Use 

Bonar, Quar. Jour. Econ., vol. iii, 5 sqq. yevons, P. E., ch. iii. Wieser, Ursprung; 
etc., des ivirtschaftlichen Werthes. Bdhm-Bantierk, in Jahrb. f. National- 
oekouomte,\o\. xiii, N. F. ['86] ; Kapital, etc., bk. iii, sec. i. Menger, Volkswirt- 
schaftslehre, 77 sqq. Roscher, §§ 4, 5. Marx, Capital, pt. i, ch. i. 

i Objective or g-eueral, the ability which a kind of 
product normally has to produce economic effects. ^ 
ii Subjective or personal, the power which a given 
piece of wealth possesses to gratify a particular human 
being at this or that time. Not only men's nature at 
large in its various situations has here to be allowed 
for, but all manner of individual peculiarities still 
more. Every one consciously or unconsciously groups'-^ 
his various wants in a certain order of importance, and 
over against each, its satisfactions, in a regular scale of 



I04 



VALUE 



degrees, always gratifying first the highest degrees of 
his foremost wants, though probably not all the lower 
degrees of these till the upper degrees of less important 
wants are met. Retrenchment, on the other hand, 
begins with the lowest degrees of the least pressing 
wants, working upward and backward, reaching last the 
things absolutely needful for life itself. The value 
which a man attaches to any article is seen from the 
grade and degree of the lowest want which he uses 
it to satisfy.^ 

1 Coal has heating power; food, nutrient power, etc. It need not 
mislead to style objective value in use intrutsic, though it, as well as every 
other form of value, is, strictly speaking, an affair of relaiion [§ 6i, n. 3]. 

2 This may be easily understood by the aid of the following diagram, 
adapted from Bohm-Bawerk and Menger : — 



Degree 


I, Food 


II, Clothing 


III, Lodging 


IV, Luxuries 


First 

Second 

Third 

Fourth 


Necessary for life 

do for health 
Agreeable 
Still less keenly so 


First suit, necessary 
Second suit, convenient 
Third, desirable 


Abed 
A room 


A plate of 


Fifth 


Still less 


Fourth, not unacceptable 


A suite of two 


cream 
Two plates of 


Sixth 


Satiety 


Fifth, satiety 


or three 
A suite of four 
Satiety 


cream 
Three plates 
Satiety 



The supply of wants proceeds [irregularly, and this in different ways with 
different persons] downward and to the right; retrenchment upward and 
to the left. " The difference in degree of importance between one meal 
when it is the only accessible one, and one meal when it is any one of 
five, is not as 5 to I, but as infinity to I. "When we draw near to absolute 
necessity, the increase in importance is geometrical rather than .^.rithmeti- 
cal" [Bonar, as above]. Even when a thing is made necessary only by 
some pet view or preference of the individual, its importance " often 
increases with decrease in its quantity, in far greater than arithmetical 
proportion" [ibid.]. 

^ A western farmer may use corn to eat and to burn. Then its fuel 
value is to him the value of the corn. Subjective value is thus disclosed, 



VALUE 105 

not by its utility at large, but by its Imvcst [often called final] utility. Let 
the farmer run short of supplies in both kinds, the fuel-use of his corn will 
be foregone the earlier. Notice that the value of a given ivhole is not told 
by the lowest use to which any of its parts are put, but by the lowest use 
made of it as a whole. Each of several interchangeable and equally 
worthful parts reveals the estimate its owner places on it by the lowest use 
he makes of any. The value of an article to you is also revealed by the 
utility to you of what you are willing to give for it. 

§ 63 Value in Exchange 

The authh. at §§ 61, 62. Also, Pf rry, ch. iii. ^/(ic/^ij;/, Elements, ch. ii. Bagekot,'E.c. 
Studies, loi sqq. Mill, bk. iii, ch. ii. Gide, La Notion de la Valenr datis Bastuii, 
Rev. d. Eco7i.pol., Mai-Juin, '87. Marx, pt. i, ch. ii. Sidgwick, bk. ii, ch. ii. 

From these variations of value in use according to 
persons, places, and times, spring the phenomena of 
exchange ^ and value in exchange. To be valuable in 
exchange, a ware or a service must of course have sus- 
ceptibility ^ to exchange, as well as utility. A single 
case of value in exchange always presupposes two 
persons and two fourfold estimates, each party sub- 
jectively valuing what he offers, and the suggested 
return, at the same time surmising how both are val- 
ued by the other. These estimates are determined by 
a great variety of circumstances : knowledge or beliefs 
touching the conditions of production, the number of 
would-be buyers or of would-be sellers, or the value in 
use of the article in question to any or all. "When 
many potential exchangers come into vicinity, forming 
a market,^ the market rate of exchange at that given 
time is fixed by the estimates of the weakest actual 
buyers and the weakest actual sellers. 

1 But for the different scales and degrees of value [§ 62, n. 2] put by 
different parties upon one and the same thing, exchange would be un- 
known. See § 52. 



I06 VALUE 

2 Our intellectual capital cannot be exchanged, though many of its 
products may be. It is capital, and wealth, and has value [in use], none 
the less [§ i, n. 6]. 

3 This is the most interesting case. On what forms a ' market,' Bagehot, 
Ec. Studies, iii [Ad. Smith]; Cairnes, Leading Prin., 17-40; Thornton, 
Labour, bk. ii, ch. i; Mill, bk. iii, ch. ii; Bonar, Quar. Jour. Econ., vol. 
iii, 15. Bonar has this diagram: 



WOULD- 


BE Buyers 


(subjectively) 


Ai values 


a horse at £<ao 


A2 " 


56 


A3 " 


" 52 


A* " 


48 


AS " 


" 44 


A6 " 


" 42 


A' " 


" 40 


A8 " 


36 


A9 " 


" 34 


Aio ♦' 


30 



Would-be 


Sellers 


(subjectively) 


B^ values his horse at £•20 


B2 " 


" 22 


B3 " 


" 30 


B4 " 


34 


BS " 


" 40 


B6 " 


43 


B7 " 


" SO 


B8 " 


" 52 



The horses are supposed to be of the same quality. The As and the Bs 
are ' strong ' in proportion to their eagerness to buy or to sell : i.e., those 
willing to give the highest prices are the strongest buyers, those willing to 
take the lowest, the strongest sellers. Assuming, what is likely to happen, 
that the parties on both sides effect exchanges something in the order of 
their strength, 5 trades and only 5 will be made, viz., between the As^"^ 
and the Bs^"^. A^ will give but 42, which is under the figure demanded 
for any of the three horses remaining. B^ asks 43, too high for any 
would-be buyers who are left. A^ is willing to give 44 or less, B^ to take 
40 or more : the market value, till the conditions change, rests at one or 
the other of these figures, or between. A^ is in this case the weakest 
buyer, B^ the weakest seller, the two constituting the ' terminal pair.' On 
the worst day of the snow blockade in N. Y. City, Mch. 6, 1888, Tiffany 
sold only 80 cents' worth of goods; a certain retail grocer, ^10,000 worth. 
Tiffany could not that day have raised his prices at all; the grocer could 
probably have doubled. 



VALUE 107 



§ 64 Price 

Marx, Capital, pt. i, ch. i, sec. 3. Mangoldt, §§ 63-74. Gamier, Traiie, 667 sqq. 
Marshall, Q.(yaX.e.vcvf. Rev., Mch., 1887. Lehr, Vierteljahrsch. f. Volkswirtsch., 
xxvi, i, 2. Roscher, §§ icx), loi. Bohm-Bawerk, Kapital, etc., bk. iii, sec. ii. 

When of any article the value is expressed in terms 
of some other, that other may be called the 'value- 
form ' of such article.^ The most common value-form 
attached to goods is money, and the money value-form 
is price. It will be seen that while general rises and 
falls of prices frequently occur,^ such an event mean- 
ing only a change in the purchasing power of money, 
to speak of a general rise or fall in exchange-values 
would be a contradiction in terms. 

^ When, e.g., it is said that ' a bushel of wheat is worth a dollar,' the 
expression is by no means an equation, though involving the idea of one. 
The terms could indeed be reversed without falsehood, but not without 
altering the meaning. 

2 Greatly infringing justice and discouraging trade. See, later, § 85, on 
Ideal Money. 



§ 65 Normal Value in Exchange 

Cairnes, Leading Principles, pt. i, chaps, iii, iv. Ad. Smith, bk. i, ch. xi. Mill, 
bk. iii, chaps, ii-iv. Maine, Village Communities, vi. Senior,-Vo\. Econ., loi, 102. 

Of the commodities producible at will in indefinite 
amounts, much the larger part of all, market values 
and prices 1 are not fixed ultimately by the influences 
mentioned at § 63, but by cost of production, or, more 
strictly, that of reproduction.^ This cost may be styled 
the normal value of commodities. Around it market 
values and prices will hover, sometimes higher, some- 
times lower, according to circumstances, but never for 



I08 VALUE 

any considerable period^ very far away. If, in the case of 
a given article, different portions of the necessary supply 
offered in one and the same market have unlike costs 
of production, normal value coincides with the clearest 
cost involved.* Things like heirlooms, paintings of old 
masters,^ etc., which cannot be duplicated, are subject 
to no law of normal value, but command a higher price 
or a lower purely according to the relations between 
supply and demand.^ 

1 Why mention ' market values '? Why is not ' prices ' sufficient? Be- 
cause the law would hold equally if money had never been invented 

[§64]. 

2 See §§ 47, 48. If classes of goods be taken, cost of reproduction and 
of production will not vary much. The strictly ultimate determinant is the 
metaphysical cost [§ 47]. Cf. Hyndman, Hist. Basis of Socialism, 105. 
The discussion contemplates primary sales, viz., by growers or manufact- 
urers themselves. Cost of production at the retail stage of the process 
includes allowances for handling, tare and tret, interest, storage, etc. Cf. 
§ 69, ii. 

^ Though temporarily perhaps a good deal above or below [scarcity 
prices]. During the snow blockade, Mch. 6, 1888, milk sold in N. Y. City 
for ^5 and ^6 per can of 40 qts. The next day it had fallen to ^i. Henry 
George found flour at the Frazer River gold diggings, in 1858, worth ^1.50 
a lb.; bacon, $3. To Purchas's 'Pilgrimes' [vol. i, 118, 133, 275, 417: see 
Tylor's Early H. of Mankind, 223] the natives of Madagascar were glad to 
pay a sheep for i^. silver; a cow for 3^. bd. At Saldanha Bay, on the west 
coast of Africa, in 1598, the natives, ignorant how to work iron, offered 
John Davis fat sheep and bullocks for nails or bits of old iron. In 1604 
a huge bullock was to be bought there for a piece of iron hoop. If com- 
petition is free [Senior, 102], variation from cost of production, in an 
article whose price is determined by this, always tends to annihilate itself. 
If prices exceed this cost, production will be the more profitable, and hence 
copious; if they are below it, production falls off. 

* An important principle. See on Rent, in Part IV. All the wheat of a 
given quality for sale in Chicago bears the same price, whether from poor 
land or rich, raised with good machinery or none. Block Island poultry, 
though produced at less than normal expense, brings in Providence as high 



VALUE 109 

prices as any. When demand diminishes, the costlier parts of the supply 
arc dispensed with first, and the normal value falls [of. § 27, n. 3]. 

^ And some others. See § 68 and § 69, i. Cf. below, n, 6. On prices 
of monopolized wealth, § 66. The famous sermon preached by John Knox 
at Edinburgh, in August, 1565, "for the whiche he was inhibite preaching 
for a season," was sold recently for ^2,075. A few years ago a Madonna 
by Murillo brought in Paris 615,300 francs. One Banks, in N. Y. City, 
sold from his arm, for transfusion into the veins of an asphyxiated patient, 
8 ounces of blood, containing 240 drops each, for 10 cents a drop : = ^192. 
Gen. R. B. Marcy has seen, in camp on the plains, ^10 offered for a quid 
of tobacco. Consul L. Mummius, having conquered Corinth, 148 or 147 
B.C., on sending the pictures and statues to Rome, told the sailors that if 
they lost or injured any, they must furnish others of equal value. One of 
the choicest works of the painter Aristides he let them use as a draught- 
board [Liddell, Rome, 479]. 

6 Mangoldt, §§ 64-66. Demand differs from mere desire. It is this 
coupled with the necessary goods or credit. Supply, too, is more than the 
simple existence of commodities. Their owner must be willing, at some 
rate, to exchange them. Cf. § 63, also Cairnes, pt. i, ch. ii. The market 
value of all things at times and, to an extent, of all ordinary commodities 
at all times, is regulated by the equation between supply and demand. 
Inequality at any moment between these is equalized by readjustment 
of value. Demand increasing, value rises; diminishing, it falls. Supply 
diminishing, value rises; increasing, it falls. The rise or the fall con- 
tinues until demand and supply are again equal, "and the value which a 
commodity will bring in any market, is no other than the value which, in 
that market, gives a demand just sufficient to carry off the existing or 
expected supply." Mill, bk. iii, ch. ii, §§ 2, 3, 4. On de Molinari's law 
respecting the ratio at which change in supply acts on price, § 15, n. 5. 
The law is as follows : " When the relation of the quantities of two prod- 
ucts or services offered in exchange, varies in an arithmetical ratio, the 
relation of the values of those two products or services varies in a geo- 
metrical ratio " {_Jour. des icon., Feb., 1889, 188] . When the N. Y. Trib- 
une reduced the price of its copies from 4 to 3 cents, 25 per cent, its 
circulation increased 30 per cent, though income therefrom fell off [as 
stated] 19 per cent. The Times reduced from 4 to 2 cents, 50 per cent, 
gaining 130 per cent in circulation and 15 per cent in income. 



CHAPTER IV 

VALUE: PECULIAR PROBLEMS 

§ 66 Competition and Value 

Caimes, Leading Principles, Harper's ed., 87 sqq. Sidgwick, bk. ii, ch. ii. Ingram, 
Hist, of P. E., 158. Clark &' Giddings, Mod. Distrib. Process, chaps, i, ii. Bage- 
hot, Postulates of P. E. 

That market value should absolutely conform to cost 
of production, in the way just described, would pre- 
suppose (i) general information touching all cases of 
profits,^ (ii) equality of advantage among competitors, 
and (iii) perfect mobility of labor and capital.^ Such 
conditions are rarely if ever realized^ save in a very 
imperfect way. As to labor, not only do poverty, 
ignorance, their distance apart and differences of 
speech keep people from full competition, but not all 
those of a given vicinity compete for all positions. In- 
stead, we everywhere find an arrangement of groups* 
and sub-groups, according to occupation, ability, and 
training, within each of which there is competition, be- 
tween which, little or none. The tendency of trades- 
unions is to check competition still more. Capital, too, 
crowds capital only in proportion as (i) it remains free 
or non-specialized,^ (ii) profits are known, and (iii) mo- 
nopoly is prevented. A monopoly may be kept up 
either by the action of government, or by the sheer 
mass of wealth behind it.^ 



value: peculiar problems 



III 



1 As sucn knowledge is rarely direct or exact, and always incomplete, 
statements about the proportion of national income taking the form of 
profits are little but guesses. Rate of interest is no guide. Thus, ignorant 
of each other's prosperity, businesses will not uniformly so compete as to 
keep selling prices the closest possible to cost. Absence of (ii) and (iii) 
would also help prevent this. 

2 The fundamental postulate of English Economics, which, however, 
Bagehot correctly declared only hypothetically true for much of modern Eu- 
rope, and not true at all for primitive society. He was mistaken in sup- 
posing that it would ever accord with facts in other than a general way. 

^ Usually, therefore, all that can be said is that products tend to sell at 
cost of production [§ 65, n. 2]. The law is, however, little less valuable 
because inexact. 



responsible 
brain workers 
automatic 
brain workers 
responsible 
manual labor 
automatic 
manual labor 



a -^ S - 
■? 2 S 2 



« -i4 ^^ _* 

? 2 s 2 



























































































































iroi 


1 and s 


teel 




ore 





This diagram, modified from Giddings, as above, shows by way of ex- 
ample the non-competitive grouping in the iron and steel industry. Ob- 
serve that competition is more widely possible the lower the grade of 
labor. Ore-diggers [unskilled] and smelters may compete with the lowest 
iron and steel workers, and both with the automatists engaged upon final 
products. Higher up, work is mostly more specialized. Notwithstand- 
ing all the above, a degree of competition, defying the lines of classes 
and industries, still persists through the supply of youthful laborers con- 
tinually coming on to the stage, choosing this calling or that, as offers 
best remuneration. Machinery and education extend the scope of this 
process. 

* Cf. § 29, notes 6, 7. 

6 Those who deny the possibility of maintaining a monopoly in the 
last way named, overlook (i) the extent to which profits are concealed, 
(ii) the progressive immunity from competition which comes with immen- 



1 12 VALUE : PECULIAR PROBLEMS 

sity of resources and specialization of plant, and (iii) the temptation of 
formal competitors not to become real ones, they sharing all the advan- 
tages from the elevation of prices [next §, and its n. 4]. 



§ 6^ Monopoly Value 

Sidgwick, bk. ii, ch. x. Marshall, Ec. of Industry, i8o sqq. Senior, Pol. Econ., 103- 
114. Sutnner, Essays, 46. Quar. Jour. Econ., vol. iii, 143. 

Monopolies may be natural or artificial,^ exclusive ^ 

or partial. A monopoly, again, whether complete or 
not, may be in an article whose production can be 
swollen (i) not at all, (ii) indefinitely, but at increasing 
cost, or (iii) indefinitely at the same or lessening cost.^ 
The monopolist's power will vary accordingly, but it is 
important to mark that he need never, in order to dic- 
tate sale prices, control the entire production.* In 
case of a product so monopolized, the price is fixed not 
by cost but by men's necessity. It goes higher and 
higher till demand, and hence profit, begins to fall off, 
and then plays about the line of what the market will 
bear, just as in other cases about that of cost. The 
monopolist can be more or less exacting according to 
the nature of the product. If it is a luxury, he 
extorts little ; if a necessity, he may bleed consumers 
to death. ^ 

1 Government is a monopoly, natural and exclusive. A railroad, once 
created, has a natural, though incomplete, monopoly of its strictly way 
traffic — natural in that, power once given it to be a railroad, t.ionopoly 
arises without further legislation; incomplete, since means of possible 
competition remain. Land-holding, be it private or communal, naturally 
involves monopoly. So the ownership of mines, water-power, and the 
like. The legislation granting the titles in such cases does not create, it 
merely assigns, the monopolies. But when, as so often under Elizabeth 
and James I, public power grants the exclusive right to manufacture or 



value: peculiar problems 113 

sell, the monopoly originates in the grant [artificially], not in the nature 
of the case. 

2 " Constantia (wine) owes its peculiar flavor to the agency of a few 
acres of ground, and would be destroyed if high cultivation were employed 
to force from that ground a larger quantity of wine. No person but the 
proprietor of the Constantia farm can be a producer" [Senior, P. E., 104]. 
Not so a railway. If it is too extortionate, some people will use wagons. 

3 The owner of Constantia [n. 2] illustrates (i) ; the proprietor of a rare 
mine, (ii) : see § 34; the patentee of a manufacturing machine or pro- 
cess, (iii). 

* Immediate mastery of a decided majority is, as regards dominating 
the price, the mastery of all. That is, competition with a partial monopoly 
is formal only, and it does not become real until competitors attain power 
to supply the entire market. The law of dearest cost [§ 65 and n. 4] has 
here one of its applications. For illustrations, Quar. Jour. Econ., vol. iii, 
142 sq. Cf. above, § 66, n. 6. 

s " The price cannot, of course, fall below the cost of production, but 
may indefinitely exceed it. . . . If fashion were to make it an object of 
intense desire among the opulent, a pipe of Constantia [n. 2], costing 
perhaps ;^20, might sell for ;^20,ooo " [Senior]. Imagine a monopoly 
over quinine in a typhoid epidemic. The parlor and sleeping-car service 
is a monopoly in a luxury. Rates must be moderate, else people will take 
the ordinary coaches. 



§ 68 Values between Non-Competing Groups 

Mill, bk. iii, ch. xviii; Essay i, on Unsettled Questions. Cairnes, Leading Principles, 
pt. i, ch. iii, § 7. Sidgwick, bk. ii, cli. iii. Cherbuliez, bk. ii, ch. viii. Nichol- 
son, Money and Mon. Problems, ch. vii. Fawcett, Manual, 390 sqq. 

Products whose creators do not compete, exchange 
not in proportion to their costs of production but 
purely according to the conditions of reciprocal de- 
mand. International commerce ^ best illustrates this. 
At the opening of a trade between two countries there 
is usually a greater demand in one direction than in 
the other, at the prices first asked. Then the com- 
modity, or line of commodities, least in demand must 



114 value: peculiar problems 

be sold lower, or the trade cease, and this every time 
demand becomes slack for any commodity at the old 
price. If the demanded reduction still leaves a profit, 
the exchange will go on ; if not, not ; but so long as it 
does go on, there is always a tendency toward an equa- 
tion of international demand. The cost of ocean 
freightage rarely falls with equal weight on both coun- 
tries. It is the heavier on that one the demand for 
whose commodity is the more diminished by it from 
what such demand would be were there no charge for 
freightage, and in proportion to that diminution. The 
same principles govern among domestic groups not in 
competition. Whatever increases the demand of any 
one for outside products, or its supply of things available 
for the purchase of them, renders less favorahle the 
terms on which it will have to exchange, and vice versa; 
while all that swells outside demand for its products, 
or lessens its supply, meliorates for it the conditions of 
exchange, and vice versa. 

1 The principle of this section has ramifications difficult to follow, whose 
explication would be too lengthy. Mill's treatment [as above] is the best, 
to be read with Cairnes's reminder that the essential subject is broader 
than Mill saw, covering much domestic traffic, as well as that which crosses 
national boundaries. The main point to observe is that an exchange in 
such cases may profit the two parties very unequally. 

§ 69 Complex Cases of Value 

Mill, bk. iii, ch. xvi. 

i Wastes utilized for purposes other than gain, also 
the products of labor incidental to main callings, usually 
sell at prices which are independent of their costs, 
ii When, as often, there is for any commodity or service 



value: peculiar problems 115 

a small, though permanent clemantl, that cost of pro- 
duction which determines prices, must be construed to 
include such items as insurance, risk, interest, storage, 
lessened economy in labor force, and the like, iii Many 
a single process of production yields a main and a by- 
product, as gas and coke, or a cluster of joint products, 
as chickens and eggs, or beef, hides, and tallow. Cost 
of production will then, supposing competition, deter- 
mine the value of the total product in relation to other 
things, but not of one of its elements in relation to 
another or others. Their relative values will be such 
as to keep the relative demand for them proportionate 
to the relative natural supply ^ of them, iv Soil which 
can grow either of two grains is often the better suited 
to one. In such cases, (i) if demand forces both on to 
intermediate soil equally good for both, their general 
costs here will fix their general values, and their rela- 
tive costs their relative values; (ii) if either has to be 
grown on the soil best fitted for the other, this other will 
become cheaper, and the alien crop dearer, in propor- 
tion to the stress so created. 

1 By cheapening the one less in demand, or raising the other, or doing 
both. Suppose a special demand for coke. It can only -be met by pro- 
ducing more gas. To market this its price must be lowered, though the 
cost of production of it, by itself, has not altered. Make other suppositions 
and carry through the analysis. 

§ 70 A Measure of Exchange-Value^ 

Mill, bk. iii, ch. xv. Marshall, Contemp. Rev., vol. 51, 354 sqq. Jevons, Money and 
the Mech. of Exchange, ch. xxv. Yves Guyot, Set. Economique, bk. iii, ch. ii. 
Mangold t, §§75 sqq. 

While labor, corn, money, or any other service or 
commodity, will serve as a measure of the relative val- 



1 16 VALUE : PECULIAR PROBLEMS 

ues^ of particular things at a given time and place, or of 
the clianges in these between different times and places,^ 
no even approximate gauge of exchange-value in gen- 
eral is furnished by nature. Art itself could not make 
such a measure perfectly accurate ; but a compound 
standard,* formed by adding the values, ascertained from 
period to period, of fixed amounts and qualities of the 
world's staple commodities, each allowed weight accord- 
ing to the quantity of it consumed, would closely meet 
the requirement.^ Then, by carefully expanding and 
contracting the currency, money could be kept in con- 
formity with such composite standard, thus realizing a 
measure of general value in one single commodity.^ 

1 The problem concerning a measure of value in use [§ 62] is very dif- 
ferent. See Clark, Philos. of Wealth, 89. He thinks even that not in- 
soluble. So Friedlander, Theorie d. Werthes [1852]. Ad. Smith's idea, 
bk. i, ch. V, vi^here he argues for labor as a measure, is not exclusively that 
of exchange value. This theory of Smith, Franklin had stated and avowed 
so early as 1752. To-day the socialists are its great champions. Rae, 
Contemp. Socialism, 94 sq., 152 sq. Value, says Marx, is neither v. in use 
nor v. in exchange, but labor-quality. 

2 If one thing is worth 2 bushels of wheat and another 3, the first is 
obviously worth | as much as the second. The same if iron, coal, or money 
had served as measure. But after any lapse of time you could not reckon 
from mere equality in value between the first and 2 bushels of wheat, that 
it was still worth f the second. The value of wheat itself might have 
altered. See next n. 

3 If a bushel of wheat would buy a day's farm labor in 1850, and only f 
of this in 1870, we know that wages, in terms of wheat, went up during 
that double decade in the ratio of 2 : 3, or 50 per cent. But whether wages 
rose in general purchasing power, neither wheat, gold, nor any other com- 
modity, left to natural fluctuations, would reveal. 

* See Jevons, as above. He has wrought out the general idea more 
fully in his Investigations in Currency and Finance, section ii. 

^ In denying that we " can even suppose any state of circumstances in 
which this would be true," Mill does not take account of the possibility 



value: peculiar problems 117 

here set forth. His is the common idea. See Fix, Jour, des &con., 1844, 
IX, 12. So Ricardo wrote, in Proposals for an Economic and Secure 
Currency, sections i, iii, "against such variation there is no possible 
remedy." 

^ See later, § 85. Mill, as above, well charges us to distinguish between 
a measure of value and a regulator or determinant of value, such as cost 
of production is. To conceive a measure of cost of production Mill [ibid.] 
thinks not difficult, though no such is forthcoming in nature. 



§ 71 The Value of Futures . 

Bohm-Bawerk, Kapiialn. Kap.-zins, vol. ii, bk. iii, sec. iii. Gross, ' Zeit in d. Volks- 
wirisck.,' in Zeitsch. f. die gesam. Staatsw., 1883, 126 sqq. Jevons, Theo. of 
P. E. Mill, bk. i, ch. xi. Menger, as at § 62, 127 sqq. Sax, Grundlegung, 
178 sqq., 313 sqq. 

i Owing to (i) the productive power of present goods 
meantime, (ii) our uncertainty about future demand 
and supply, and (iii) our undervaluation of future 
pleasures and pains, future goods, per unit of quan- 
tity and quality, have for most men a lower subjective 
value in use than present goods, ii From these sub- 
jective valuations arise corresponding objective values 
and market prices, which, reacting upon present goods, 
raise the subjective exchange valuations of these even 
for the few in whose mere personal estimation futures 
might have seemed superior, iii The levelling ten- 
dencies of the market then bring it about that, barring 
special causes of disturbance, futures will in the market 
bear prices less than those of siniilar spot articles, by 
a figure proportioned to the degree of their futurity.^ 

^ This is the very valuable pith of what is strictly original in Bohm- 
Bawerk's book. The thought is wrought out with great thoroughness in 
his section cited above, and must henceforth be regarded as an integral 
principle of Economics. For his application of it to the problem of inter- 
est, see § 109. 



Part III 



MONEY AND CREDIT 
CHAPTER I 

THE NATURAL HISTORY OF MONEY 

§ 72 Barter 

Knies, Geld, i. y evens, Mo. and the Mech. of Exchange, ch. i. Aristotle, Politics 
bk. i, ch. ix. Nicholson, Mo. and Mon. Problems, 17. Macleod, Elements, 120. 

Barter is a form of traffic in which commodity passes 
for commodity without any use of money or other tool 
of exchange. The infehcities of barter-exchange con- 
fine it in the main to the societies that are the least 
civilized and productive.^ The chief drawbacks are 
i Necessity of setting a price to every commodity in 
terms of every other.^ ii Want of subdivisibility in 
most articles.^ iii Limited correspondence between 
needs and commodities or services. A special degree 
of this evil exists in the case of the laborer, who can 
work only for such as have, and will spare, the things 
needed for his support. When money of account is 
used to reckon in, yet no money ever passes hands, we 
may call the practice quasi-barter.* 

1 Although it has nowhere ceased entirely. Swapping horses or knives, 
changing works or teams [among farmers], taking cows or work animals 
for their keep, commonly involve no thought of money. Macleod con- 



THE NATURAL HISTORY OF MONEY 1 19 

siders the society described by Homer still in a state of barter. Iliad, ii, 
448, vi, 234, vii, 468, xxiii, 703. It was primitive money [next §] rather, 
but the passages usefully illustrate the evil phases of barter. 

2 Between 100 articles no less than 4950 possible ratios of exchange 
exist, all which a retailer on the truck system would constantly have to 
keep run of. With money, the number reduces to 100. 

2 Many could not be divided at all, others not without impairing or 
destroying their value. 

* The line between barter and money is passed when, in trading, men 
accept this or that as pay, with the idea of recourse : i.e., intending not to 
use what they get, but to pass it off for the thing wanted. This transition, 
when gCNcral, is a decisive step in the onward march of civilization. 

§ 73 Primitive Money 

Jevons, ch. iv. Chapin's Wayland, 289. Ad. Smith, bk. i, ch. iv. Roscher, § 118. 
Lubbock, ' Early H. of Mo.,' Contemp. Rev., 1879. 

In the evolution of society upward through succeed- 
ing stages, very various commodities have served as 
media of exchange. Of these may be mentioned espe- 
cially : (i) peltry in the hunting state,^ (ii) cattle ^ and 
slaves in the pastoral, (iii) corn ^ and other cereals, with 
beans, olive oil, tol>acco, etc., in the agricultural, (iv) 
mats, pieces of cloth, nails ^ and various other manu- 
factured articles, in a more civilized state, (v) cowrie 
shells,^ wampum^ and other articles of beauty, in every 
state previous to the invention of regular money. Gold 
and silver probably first obtained currency through use 
for personal adornmentJ 

1 According to the Bismarck Tribune, 1885, gopher tails were then 
currency in parts of Dakota. 

2 Cattle were the main money of Homeric times [§ 72, n. i]. Also 
among the Hindoos in the age to which the earliest Rig-Vedic hymns 
relate, 3000-4000 B.C. ' India,' in Encyc. Brit. Our word ' fee ' originally 
meant 'cattle' [so the "LzXin pecunia, money, z.nApeculatus, property, from 
pecus, a ' herd ' of cattle or sheep]. 

3 So. Carolina, in 1687, made "come, pease, pork, beef, tobacco, an<^ 



I20 THE 'NATURAL HISTORY OF MONEY 

tars " general legal tender. The role of tobacco as money in early Vir- 
ginia and Maryland is well known. Mexico, when the Spaniards arrived, 
had no gold money, though both gold and silver were wrought, but for 
money used cacao beans in little bags holding 8000-24000 each, cotton 
materials, gold dust in goose-quills with values according to size, pieces of 
copper 3-4 fingers wide, and little tin plates. Schoenberg, I, 38, n. [2d 
ed.]. Morgan, Anct. Society, pt. ii, ch. vii, says the Aztecs had no money, 
but barter only. In Thibet, cakes of salt and of tea were money and legal 
tender till somewhat recently. La Couperie, Silver Coinage of Thibet. 

* Ad. Smith [as above] had heard that nails were still in his time used 
for small change in parts of Scotland. There is tin money in China and 
the Malay Archipelago. In Senegambia iron is money, as in ancient 
Sparta, where Lycurgus's laws forbade the possession of gold. Iron was 
a precious metal among the old Turanians of Babylon. Maspero, Hist, 
anc, 140 sqq. 

s A beautiful shell, about an inch long, white and straw-colored without, 
blue within, found nearly all over the world, especially in the shallow 
waters of the Indian Ocean. There are over lOO species. The one in 
question is the cypraea moneta — ' cypraea ' from the name of the mol- 
lusk which it clothes, ' moneta ' from its wide use as money. On parts of 
the coast of Africa it is the regular tender, and it still enjoys great currency 
in farther India. In Bengal, formerly, 3840 equalled a rupee [50 cents]. 
' Cowry,' in Encyc. Brit. 

6 On wampum as money in colonial times, Weeden, in Johns Hopkins 
Univ. Studies, 2d ser., viii-ix. 

^ But F. A. Paley, Contemp. Rev., Aug., 1884, argues learnedly that 
gold was first esteemed in connection with sun-worship. In Genesis, 
ch. xxiv, gold is only a commodity, bought with silver. More, Utopia, 
ch. vi, represents the Utopians as eating from earthen and glass, while 
using gold and silver for gyves to bind criminals, earrings to brand infa- 
mous persons, and even for purposes namelessly vile. 

§ 74 Money Proper 

Mill, bk. iii, chap. vii. Sidgwick, bk. ii, ch. iv. Bastable, ' Money,' in Encyc. Brit. 
N'icholson, Mo. and Mon. Prob., ch. iii. Roscher, vol. i, § 119; vol. iii {Handel u. 
Ge'werhefleiss\ § 40. Schoenberg, vol. i, VII. Walker, Money, ch. ii. Mangoldt, 
§§ 50 sqq. 

All exchange by means of primitive currency must 
manifestly have labored under many of the disadvan- 



THE NATURAL HISTORY OF MONEY 121 

tages of barter itself. Exchange could not become 
facile or extensive until commodities were discovered 
so uniformly desirable as to possess, by universal con- 
sent, a universal purchasing power, in other words, 
exchange readily everywhere for all commodities and 
services whatever, thus becoming money proper.^ Gold 
and silver proved such commodities. Long current at 
first by weight and test, they acquired far fuller use- 
fulness with the invention and extension of authoritative 
coining.^ 

1 ' A universally successful tender ' is perhaps the best definition of 
[full] money. Cf. § 82. Other things are then money only in so far as 
they meet this criterion. F. A. Walker, ' Money,' followed by Bastable, 
calls money " that which passes freely from hand to hand throughout the 
community in final discharge of debts and full payment for conmiodities, 
being accepted equally without reference to the character or credit of the 
person who offers it and without the intention of the person who receives 
it to consume it or enjoy it or apply it to any other use than in turn to 
tender it to others in discharge of debts or payment for commodities." 
This, of course, includes bank notes. Defining so, you are forced to sub- 
divide money into kinds. Sidgwick, and J. H. Walker [Mo., Trade and 
Banking] include checks and all bankers' liabilities in 'money.' There 
are advantages to this, also disadvantages, as to any terminology. Choice 
of definition is less important than consistency in holding to the one chosen. 

2 See next §, iii, (ii,) and n. 10. 

§ 75 The Money Metals 

Roscher, vol. iii, ch. vi. Jevons, chaps, v, vi. Schoenberg, vol. i, VH, iii, iv. 
EissUr, The Metallurgy of Gold; do. of silver. Walker, Money, chaps, v-viii. 
Bastable, ' Money,' in Encyc. Brit. 

Gold and silver possess various attributes besides 
universal currency which fit them to serve as money 
better than any other known material. They are : 
i Convenient : ^ (a) divisible, (b) durable, (c) impressi- 
ble, (d) portable, ii Steadiest of all things in value, 



122 THE NATURAL HISTORY OF MONEY 

owing to, (i) size and regularity of demand,^ (ii) large- 
ness 3 of quantity in use, (iii) uniformity in cost of pro- 
duction,* (iv) facility of transportation,^ (v) tendency of 
every rise or fall in value to be checked by change in, 
(a) production^ of the metals themselves, (b) use of 
credit,'^ (c) exchange power of a given amount^ of the 
money, iii Relatively independent, in value, of gov- 
ernmental act. (i) Legal enactments do not make 
them into money. (ii) Government, though it may 
modify, cannot fix their value,^ coinage only attesting 
the quantity and quality of the metal in each piece.^*^ 

1 Diamonds, like gold and silver, present great weight in small compass, 
but lack qualities (a) and (c). The Regent or Pitt diamond is thought 
worth about 2.2 tons of gold coin, as much as 40 men could carry. Gold 
is in fact far from being the most valuable substance. It is worth per troy 
ounce ^20.67183. Rare metals are quoted by the gramme. Reducing 
this to troy ounces we have per troy ounce, omitting fractions, Barium 
^124, Calcium ^311, Osmium ^93, Rubidium ^622, Zirconium ^496. 
[Scient. American, June, 1886.] There are said to be 19 metals more 
precious by weight than gold, and cocaine is more so than any metal. A 
pound of steel in the form of hair springs for watches is worth [1889]. 
^140,000. Platinum, coined by Russia from 1828 to 1845, proved poor 
money, being lustreless, difficult to melt, and very fluctuating in value, 
owing to meagreness of supply. Quicksilver liquefies too easily. Copper, 
900 times less valuable per grain than gold, is, for rich societies, not pre- 
cious enough for full money, but lasts nobly. J. B. Say believed certain 
copper coins to be still current in France early in this century which had 
never been out of circulation since the days of the Roman empire [Blanqui, 
vol. i, 321]. As to weight, gold [spec. grav. 19.253] is the heaviest metal 
but two: platinum [21.5], and iridium [22.23]. Silver has a spec. grav. 
of 10.474; copper, one of 8.8. 

2 The demand for money consists of all goods, services, etc., whatever, 
which are offered for money. 

^ Of gold the world's existing stock, coin and wares, is about 11,000 
tons, worth ^7,700,000,000. The usual yearly loss, literal and from attri- 
tion, etc., is 2 tons, or ^1,400,000. The mines yield yearly some ^85,000,000, 



THE NATURAL HISTORY OF MONEY 1 23 

of which, till lately, ^ has gone into coin, the rest into wares. Now, the 
consumption for wares is greater, about $62,500,000 annually. The gold 
in the world in 1884, in form of coin or of bullion covering notes, was 
$3,700,000,000 [Del Mar.], $3,400,000,000 [Burchard], or $3,270,000,000 
[Soetbeer]. The silver of the civilized nations in 1884, money and hoards, 
was estimated at $2,185,000,000, and the increase that year, not quite 
$130,000,000. Of silver the western nations use in manufactures some 
$22,000,000, and send to Asia about $72,000,000, hoarding or coining not 
over $35,000,000. 

* Greater for silver than for gold, because of its wider and more equable 
distribution in the earth. Suess, Zukunft des Goldes. 

^ See § 76. Here gold, value for value, has enormous advantage over 
silver: $1,000,060 in gold weighing only about if tons, in silver 26| tons. 
For subsidiary silver, about 6.4 per cent lighter than the dollars, the figure 
would be 25 tons; for nickel half dimes, 100 tons. 

^ If gold, e.g., ever becomes abnormally dear, mining it pays better, the 
output increases, and the extra preciousness disappears, or tends to. Also 
vice versa. Notice, however, that, with the growth of fixed capital in 
mining the influence described acts less promptly. Hadley, Railroad 
Transportation, 72. 

" In general, as money increases in value, more credit transactions take 
place, so far dispensing with money, and hence cheapening the same again. 
If it decreases in value, the reverse results appear. 

^ That $1 will now pay for as much as $1.10 would a month ago, means 
that so much more exchanging can now be effected with a given amount 
of money. This possibility has little effect in practice, because, though 
the dearer unit could exchange more, it would not do so, owing to tendency 
of dear money [low prices] to retard circulation. This is why the text 
does not, as is common, name ' swifter or slower circulation ' as an element 
in the automatism of money's value. Dear money, working as a brake on 
circulation, tends to grow dearer still: cheap money [high prices], accel- 
erating circulation, grows ever cheaper. But should extraneous causes 
give quick movement to dear money, rise in its value would be checked; 
or a slow pace to cheap money, it would tend to be less cheap. 

3 A metal not so already, might, however, become more valuable by 
being made legal currency, and it is believed that several powerful govern- 
ments could by coining upon a common ratio maintain the relative values 
of gold and silver free from essential change [next §]. Certain writers 
exaggerate, others underrate, the character of money as product of state 
action. See Horton's note. Rep. of Intl. Monetary Conf. of 1878, p. 741. 



124 THE NATURAL HISTORY OF MONEY 

^'^ This, i.e., constitutes the political essence of coining. The embossing, 
milling and other artistic work are of great service against counterfeiting, 
and may also embellish. The alloy imparts hardness. The ' fine bars ' of 
silver made by the U. S. mints and assay offices run 998-999 fine, usually 
999. The U. S. and most of Europe, coin from metal 900 fine, and bars 
of this fineness are in these lands called ' standard ' bars. Great Britain 
coins gold 9i6| fine, silver from her ' standard' silver bars, 925 fine. The 
silver quotations in London refer to such bars. There is thus no univer- 
sally recognized ' standard ' for bars of either metal, but x^Vo "^^^^ probably 
come in time to be recognized as such. Russian coins are j|- fine, like 
English gold. 

§ 76 Mode of their Distribution 

Mm, bk. iii, chaps, viii, ix, xix, xxi. Ad. Smith, bk. iv, ch. i. 

Gold and silver find their way over the earth partly 
as commodities, partly as coin. If gold is plentiful in 
any country, whether dug there or brought there, it is 
cheap, prices are high, and foreign commodities throng 
in, to be paid for by sending gold to the countries 
whence they come. On the other hand, every country 
where gold is scarce will have low prices, and gold will 
be tempted in to purchase commodities for exportation.^ 

1 A fine example of the play of natural law in the social world [§ 15, 
n. 5]. During the potato famine of 1847 Great Britain had to import 
enormous quantities of grain from America, sending hither therefor the 
sum of ;i^i 6,000,000 in bullion. Prices at once rose here and fell in 
England. Eng. merchants bought less in America, while Americans bought 
largely in England, so that, the next year, all the gold returned to Great 
• Britain. Toynbee, Industrial Revolution, 82 sq. The processes described 
are of course more or less obstructed by tariffs, and by whatever h.nders 
trade [§§ 54, 55]. 



THE NATURAL HISTORY OF MONEY 12$ 

§ yy Bimetallism 

Nicholson, Mo. and Mon. Problems, pt. ii. Walker, P. E., 406 sqq. ; Money, chaps. 

xii, xiii; Mo. Trade, and Ind., chaps, vi, vii. Laugklin, ed. of Mill, 633 [good 
bibliog.]. yevons, c\\. xW. Schaeffle, Fur internal. Doppehv'dhrung. Arendt, 

Vertragsmdssige Doppelwahrung. Wag7ter, in Zeitsch. f. gesam. Staatsiu., 
1880, IV, 1881, I. Suess, Zukunft d. Goldes. Lexis, in Conrad's yahrb., 1877, n; 
1880,1; 1882,1. Soetbeer, ibid., z?}Zo,i; Vierteljahrsch.f. l^olkswirlsc/i. , ^Xll, 
ii, 2. Laveleye, La mon. bimeialliqtte. Piiiz, Graph. Darst. d. Metallpreise. 
Nasse, in Schoenberg, vol. i, VII, xi, 3. U. S. Consular Rep., Dec, 1887. 

Bimetallic money is money formed by opening gold 
and silver both to free comage,i and making each an 
unlimited legal tender at a certain permanent legal 
value-ratio ^ to the other. Its superiority, supposing 
the scheme feasible, arises from two facts : i It will add 
steadiness to the value of the dollar or other unit of 
value, since this, as we have seen,^ is complete in pro- 
portion to the size of the whole volume of unwrought * 
money-metal. Gold and silver together of course form 
a far vaster reservoir than either by itself. But a 
bimetallic money-unit will be less changeful than a 
monometallic, even if the whole money-metal volume 
is the same in the two cases, as fluctuations^ in both 
metals at one and the same time are less probable 
than in one alone, ii Such a system would furnish a 
common measure of value between its members and 
gold monometallist or silver monometallist states,^ and 
between these latter also. The serious question is 
whether the two metals can be made a single stan- 
dard of value. We pronounce this possible^ Sufficient 
nations may unite upon a given value-ratio to render 
both metals, in those nations, current together at that 
ratio, all natural tendencies to alter the rat-io, as by 
extensive losses or new discoveries of either metal, being 
instantly checked by the new demand thus originated 



126 THE NATURAL HISTORY OF MONEY 

for the cheaper metal wherewith to make payments.^ 
This bimetalHc scheme, never yet tried, entirely differs 
in principle from a unigovernmental one.^ 

1 Coinage is technically known as ' free,' even when a ' seigniorage ' is 
charged for coining [§ 85, n. 4]. Full legal tender quality in both metals 
as in U. S. since 1878, does not alone constitute bimetallism. 

2 Either 15 parts of silver to i of gold [U. S., 1792-1834], or 15J: I 
[the Latin Union, viz., France, Belgium, Switzerland, and Italy], or 16: i 
[U. S., 1834-1874, and 1878]. A ratio differing from any of these might 
of course be chosen. A grain of gold bullion is now [1889] worth nearly 
20 of silver. 

3 See § 75, ii. 

* Taking, as yet, no account of paper money. If considerable labor 
has been bestowed upon gold or silver, as in case of most wares, the por- 
tions affected no longer aid stability. They are only so much commodity. 

5 Through extraordinary discoveries or losses, exportation, or new uses 
or disuses in the arts. 

^ About ^ of the world's population uses gold only as full money [gold 
monometallists] , between ^ and ^ are bimetallists, and nearly f silver 
monometallists. On advantage ii, Bonamy Price, Contemp. Rev., Mch., 
1884, Walker, P. E., 409, 411. 

■^ On the basis of such considerations as, with the other writers named 
above. Walker [P. E., 406 sqq.] and Nicholson [228 sqq.] adduce. About 
^ the precious metal is coin or bullion accessory to coin. This part, so far 
as present in their borders, the league of nations would monopolize, which 
would go far to fix the relative demand of the 2 metals, a political cause 
determining the action of nature. To drive either sort of money to a 
premium, not only must enough of the other be supplied to displace it in 
the circulation, but a market must be found for what is displaced. Were 
the league small, both infelicities might occur : should the U. S., Gr. 
Britain and Germany join the Latin Union [n. 2] and all coin both metals 
freely, neither would be possible. Significant, too, are (i) the monetary 
hist, of France, which from the beginning of the century till 1874, unaided 
by other nations, and amid the greatest changes in the relative values of 
the 2 metals, welcomed both to its mint; and (ii) the fact that variations 
in the relative values of g. and s. have never imitated variations in relative 
supply and output, save very slowly and shghtly. The fairest plea for gold 
monometallism is Nasse's, in Schoenberg. His main arguments are the 
political difficulties of a bimetallic league, and people's dislike of silver 



THE NATURAL HISTORY OF MONEY 12/ 

because of its weight. The political difficulty is great, perhaps decisive : 
the other would mostly disappear with use of certificates. 

^ Reference here is to ordinary and local variations, radical and wide 
ones being prevented by the agencies specified in n. 7. Units of one coin, 
being cheaper yet equally good for the purpose, would be sought [by 
carrying bullion to the mint] for use in payments [Walker, Mo., 253]. 

' Hence to show, as Laughlin, H. of Bimetallism in U. S., does, the ill 
working of bimetallism in one land, in no wise disproves the scientific 
binietallist argiunent. 



CHAPTER II 

BANKS AND PAPER MONEY 

§ 78 Banks of Deposit 

yuglar, Bangues, in Say's Diet, des Finances. Courtney, ' Banking,' in Encyc. Brit. 
Horn, ' Banks,' in Lalor's Cyc. Wagner, in Schoenberg, vol. i, VIII, 11. jfevons, 
ch. xvi. Ad. Smith, bk. ii, ch. ii. Bowen, American Pol. Econ., 316. Walker, 
Money, 409 sqq. 

The use of metallic currency is attended with certain 
disadvantages, as (i) labor and expense of counting, 
(ii) labor, expense and risk of transportation, (iii) lia- 
bility to rolblbery, (iv) difficulty of identification, (v) 

dearness. All these are lessened by substituting paper 
for coin.i As trade multiplied, therefore, it naturally 
occurred to merchants to deposit their specie with 
some responsible party and traffic with his certificates 
of deposit, the specie for each certificate being obtain- 
able by the holder on call,^ and, at the outset, a slight 
premium allowed for the care of the money. Hence 
arose banks of deposit, serving to facilitate exchanges 
not only between individuals but also between cities 
and nations. 

1 Touching most of the items this is obvious. As to (iii), compare in 
ease of concealment, ;^ 1,000,000 in gold and the same in thousand-dollar 
notes. As to (iv), notes can be numbered and marked, which would 
damage coins. Ad. Smith compares gold and silver mo. to a highway on 
the ground, paper to a wagon way through the air. In the matter of 
dearness, the use of subsidiary paper effects no saving. The necessary 
expense of keeping up our subsidiary paper circulation during and after 
the war was 5 per cent of its face value yearly, being equal to interest on 
bonds enough to purchase the silver which supplanted it. The coining of 



BANKS AND PAPER MONEY 1 29 

this cost, indeed, 1J-2 per cent, but the part of such expense belonging to 
a single year would be slight, as few if any of the coins would show wear 
in less than 50 years. And in paper money at large the saving occurs in 
interest rather than in wear. It costs Gt. Britain ^10,000 to coin a mil- 
lion sovereigns. In 15 years they need recoining, and have lost $25,000 
in value. Total expense for manufacturing and wear in 15 years, $35,000. 
The paper and printing for a million i pd. notes would cost $40,000, and 
they would have to be replaced three times at least, probably 4-6 times, in 
the 15 years. The cost for larger notes would of course be much less, and 
for the largest, under that of gold. On present condition of the Brit, 
coinage, Quarterly Rev., April, 1883, and Quar. Jour. Econ., vol. i, 225. 
The British gold coin taken together loses 4.16 per cent in 100 years, or 
a trifle over i per cent in 25 years. Sovereigns naturally wear better than 
half sovereigns. 

2 The identical coins deposited, that is, were at first to be given back, 
the loan being a commodatum [Roman law] as distinguished from a 
mututim, in which the lender can demand again only equivalence, not 
identity. It was a ' surrogate ' [doUar-for-doUar reserve] note system. 

§ 79 Developed Banking 

Quar. Jour. Econ., vol. ii, 482 sqq., 251 sqq. Macleod, Theo. and Prac. of Banking, vol. 
i, ch. ix. ' Banks,' and ' Banks of Issue,' in Lalor. Jevons, chaps, xvi sqq. Juglar, 
as at § 78. Yves Guyot, Set. Economique, bk. v, ch. iv. 

Such an institution, once established, could not but 
have the effect of bringing together borrowers and 
lenders. All persons having surplus money would 
deposit, and no objection would be raised against the 
banker's lending, so long as he promptly honored his 
paper. Hence arose banks of discount and loan,i serv- 
ing to render capital more efficient. But it proved a 
very rare occurrence for more than one-third of the 
average amount on deposit ever to be called out of 
bank, two-thirds the average being always on hand. 
Bankers, therefore, ran no appreciable risk in issuing 
promises to pay far beyond the aggregate of their 
deposits, and, as they could discount with these surplus 



130 BANKS AND PAPER MONEY 

promises no less readily than with money, the issue of 
them became a great source of income.^ Hence arose 
banks of circulation, furnishing the public with a 
cheaper and more convenient circulating medium. 

^ Discount, subtracting the interest beforehand, is now the sole form of 
regular bank loaning, except in cases of over-drafts. 

2 To explain : instead of using f the average deposit wherewith to 
discount notes, holding ^ as reserve, the entire average deposit might be 
made a reserve, and double its amount in notes used in discounting, thus 
multiplying the bank's gainful resources by 3. No fixed rule is observed 
touching the proportion of reserve, and it is rarely so much as J. Before 
the rise of the German empire Leipzig banks used to keep f, those of 
Bavaria only J [Walker, P. E., 1 76] . The banks of issue in the German 
empire have at present almost exactly $^ in reserve to every 4 in circula- 
tion, i.e., only ^ the circulation is uncovered. 



§ 80 Government Paper 

' Banking,' in Lalor. Perry, ch. xi. Walker, Money, chaps, xvi, xxi. Knox, United 
States Notes. 

Promises to pay issued directly by a sovereign power 

differ essentially from bank notes, (i) not representing ^ 
values in the same way, (ii) basing no legal claiins,^ 
and (iii) lacking elasticity^ at best in the direction of 
expansion, and, unless convertible, also in that of con- 
traction. Midway between the two kinds of paper is 
that of the United States national banks. On failure 
of one of these, the nation undertakes to insure the 
payment of its notes, yet always from the bank's own 
assets placed beforehand in the national treasury for 
that purpose.* 

1 Bank notes, though not covered dollar for dollar, are still thought of 
as ' representing ' the reserve. The nation's promises [greenbacks] bear 
no exactly similar relation to any monies in the treasury or other property. 
See next n., also § 86, n. 6. 



BANKS AND PAPER MONEY I3I 

2 Greenbacks are not a legal lien on any part of the nation's wealth, 
whether in the treasury or out, not even when a reserve is by law kept for 
their liquidation on presentation [§ 86, n. 6]. 

8 Contraction and expansion occur more or less arbitrarily, by legislative 
fiat, not likely to accord at all exactly with shifting monetary needs. This 
might, it is true, be remedied in part. We return to the subject in Part VI. 

* The system is described somewhat fully in Part VI. 



§ 81 Historical 

Juglar, and other authh., as at § 77. Gartiier, Traite, ti-j sqq. Macleod, Theo. and 
Prac. of Banking, vol. i, ch. ix. Quar. Jour. Econ., vol. ii, 251 sqq. Jevons, ch. xvi. 
Ad. Smith, bk. iv, ch. iii. Lenormant, La Monnaie dans VAntiguite. Simonin, 
' Florentine Bankers,' Rev. d. d. Mondes, Feb., 1873. 

Pieces of leather, each probably intended to represent 
a whole skin, were current money in ancient Russia. 
The Chinese,^ Tartars and Persians, had leather and 
paper money as early as the fourteenth century. Bills 
of exchange 2 were known to Assyrians, Phoenicians, 
Carthaginians, Greeks and Romans. They seem to 
have been first used in modern times to pay papal 
revenues in the crusades, many being now known dated 
in 1200^ and on till 1250. The first hank of deposit 
was erected in Venice,* 1171. The Banks of Genoa ^ 
and Barcelona rose in 1407. The Bank of Amsterdam 
dates from 1609, and still exists, though radically reor- 
ganized in 1 8 14. It, like the Bank of Venice, was 
controlled by the state, and had origin in trouble from 
depreciation of coins.^ The Bank of Hamburg was 
founded in 1619, on the same principles with that of 
Amsterdam, only not controlled by the state.^ As yet 
there were no banks in England, but, during the civil 
wars of the seventeenth century, goldsmiths received 
deposits of the precious metals, either holding them 
subject to check,^ or giving transferrible receipts. The 



132 BANKS AND PAPER MONEY 

Bank of England,^ established in 1694, was the first to 
combine the three functions of deposit, discount and 
circulation. It is at present the most powerful bank 
on the globe. Next stands the Bank of France, founded 
in 1800. 

1 Ruge, Gesch. d. Zeitalters d. Entdeckungen, beautifully reproduces 
the oldest piece of paper money in the world. The original is Chinese. 

2 Lenormant, as above, 117, translates an Assyrian bill of exchange 
belonging to the 6th century B.C. On Gr. and Roman bankers, Courtney, 
as at § 78, also Macleod, Elements, vol. i, 279 sqq.; Banking, vol. i, ch. iv, 
sec. I ; Blanqui, Hist, of P. E., ch. xv. [On the technique of the foreign 
exchanges, see § 95.] At Josephus, Antiqq., XII, iv, 7, end, one Joseph 
farms Egypt's revenues in Palestine. He keeps money with Arion, in 
Alexandria, and when the taxes are due, writes an order on Arion for their 
payment. This amounts to a bill of exchange, an international check or 
draft. 

^ Blancard, Lettre de change h Marseille au 13 Sihle. Saladin, famous 
in the 3d crusade, iiS^-gz, used bills of exchange. Is it not possible that 
this institution [like so many others] came from the Arabs, not from the 
Jews, as commonly supposed? 

* Lalor, vol. i, 227 sq., N. A. Rev., Sept., 1885, 205 sq.. Gamier, 727. 
This bank perished with the Venetian republic, 1797. 

^ This, the Bank of St. George, was perhaps the oldest bank of issue. 

^ Perry, 276, well tells the story. See, more fully. Ad. Smith, in ch. iii, 
of bk. iv. The latter thinks all the continental banks named, and that of 
Nuremberg also, to have sprung from this motive. Amsterdam's current 
money having through clipping lost 9 per cent of its face value, so tbat 
bills of exchange on the city, destined to be paid in that money, were per- 
sistently so much below par, a bank was established under the city's 
guaranty, to receive coin upon deposit according to weight, and give 
credit therefor. This credit was known aS 'bank money.' All bills of 
exchange on Amsterdam, above a certain sum, were ordered to hy, paid in 
it, whereupon [par] Amsterdam exchange speedily rose to par, and even 
above. 

■^ It still remains, and under its original organization. Soetbeer, in 
Vierteljahrsch. fiir Volkswirtsch., Jahrg. V, vol. ii. 

^ See Macleod, as above. Ibid., vol. i, 281 sqq. [4th ed.] are several of 
these primitive checks, varying somewhat in form. One reads : 



BANKS AND PAPER MONEY 1 33 

1 6th Nov., 1689 
Mr. Jackson, — Pray pay to the bearer hereof, Mr. Daniel Croker, five 
pounds, and place it to the accompt of 

Your loving friend, 

John Wynyarde 
To Mr. Roger Jackson, 
At Sir Francis Child's, Goldsmith, 
just within Temple Barr 

These drafts vi^ere sometimes payable ' to bearer ' simply, sometimes ' to 
payee or bearer,' sometimes ' to payee or order.' At first they were written 
out fully with the pen, and might be sealed. The receipts, or promissory 
notes, were always issued if the depositor preferred, and these, too, passed 
from hand to hand as well as the drafts. 

^ Noel, Les banques d' Amission en Europe, 2 vols, [noble history, from 
the sources, of all the greatest European banks]. On origin of Bank of 
Eng., Bancroft's U. S. [author's last rev.], vol. ii, 184; Macleod, Banking, 
vol. i, ch. ix. 



CHAPTER III 

THE THEORY OF MONEY 

§ 82 The First Function of Money 

Knies, Geld, v. Walker, Money, ch. i; Mo., Trade and Ind., ch. i. Perry, ch. ix. 
Nicholson, Mo. and Mon. Problems, ch. ii. Nasse, in Schoenberg, vol. i, VII, i. 
Ad. Stnith, bk. ii, ch. ii. Mill, bk. iii, ch. vii. Hildebrand, Theorie des Geldes. 
Sumner, ' Mo. and its Laws,' Internal. Rev., vol. x. Bonatny Price, ' How Mo. 
does its Work,' Contemp. Rev., Feb., 1882. Bastable, ' Money,' in Encyc. Brit. 

The first 1 and on the whole the chief business of 
money proper,^ or hard money, is to aid in effecting 
exclianges, to furnish a medium of exchange. With 
reference to it as fulfilHng this requirement, the follow- 
ing propositions are all-important : i It is still essentially 
a commodity,^ only having a universal or generalized 
purchasing power. Buyers of other things may be said 
to sell money, sellers to buy. ii The commodity's 
service as money is, however, entirely different in kind 
from that which it would render as an article of con- 
sumption.* iii Money itself is but a small fraction of 
the value which it directly and indirectly helps to ex- 
change.^ iv It so powerfully stimulates production 
by promoting exchange, that, far from being ' dead,' ^ 
it may be set down as the most productive of all capital. 

1 Both logically and [with little doubt] historically. Knies and Marx, 
however, make this function secondary to that discussed in § 83. Bring 
this § and the following §§ into relation with those of Chapter I. 

2 Cf. § 74, n. I. Whatever scope we give to 'money,' the analysis of 
its character must begin with metal money, there being many things predi- 
cable of it which are not so of any form of paper. See §§ 86, 93. 



THE THEORY OF MONEY I 35 

3 Not a mere token, or an order, as Macleod and the advocates of fiat 
money vainly teach. Hovi^ far adoption by government conveys to it its 
peculiar power in purchase cannot be confidently stated. Some exaggerate, 
others underrate this. Cf. § 75, n. 9, and Horton, as cited at § 83. 

* Knies, Geld, 2d ed., 184. 

^ See § 77, n. i. Cf. Perry, 237, and Ad. Smith, as above. A dollar 
might effect 1000 dollar exchanges in a day. Also, money aids to transfer 
vast quantities of goods merely through its denominations, without the 
slightest further intervention. At the N. Y. clearing-house, $200,000,000 
are sometimes exchanged in an hour, and as much at that in London, no 
coin or bank-notes being used except for balances [§ 94, n. i]. 

® As Newcomb and many other able authors have called it, out of a 
mistaken idea of productivity. See Walker, Mo., 22 sq., and n. 5, above. 

§ 83 The Second Function 

Roscher, bk. iii, ch. iv. Marx, Capital, pt. i, ch. iii, sec. i. Knies, Geld, iv. Yves 
Guyot, Sci. Economique, bk. iii, ch. iii. Horton, Position of Law in the Doct. of 
Money [a pamph.]. Perry, 246 sqq. 

This is that of a scale or measure of value, and is 
entirely separate in nature from the first. The two 
may and often do belong to different wares.^ Of money 
viewed in this second character we are carefully to 
remember that : i It is at best only an approximately 
invariable measure.^ ii It is a measure of value by 
virtue of being itself a value.^ iii It is a more perfect 
measure the more steady and invariable it is as to its 
own value.* iv It inevitably shrinks ^ in value so soon, 
and about in proportion, as it is multiplied beyond the 
requirements of exchange. 

1 In the U. S., 1889, gold is the measurer, while silver, nickel, copper 
and paper do the actual exchanging. If no gold at all existed in the form 
of money [coin] it might still be the measure of value. Nicholson, Mo. 
and Mon. Prob., 20. 

2 Herein differing from most other measuring scales of units [§ 87 and 
n. l]. Nicholson, 299. Marshall, approved by Nicholson, 34, deems a 
perfect measure of value unthinkable. In what sense this is so, § 70. 



136 THE THEORY OF MONEY 

s Measure and the thing measured being of the same kind or nature. 
Most measures bear this relation to the things measured. Not so the ther- 
mometer, which consists in an arrangement for measuring heat by length. 

* See §§ 75, 77, 85, and notes. 

s More strictly, perhaps, it tends to shrink, and will do so unless counter- 
causes are in play. Various influences, too, may and usually do interfere 
to prevent the depreciation from following inflation [or vice versa] with 
perfect exactness. See § 85. 

§ 84 Other Offices of Money 

Walker, Money, ch. i. Knies, Geld, vi, vii. Jevons [ch. iii], Nicholson, and Bastable, 
as at preceding §§. 

Besides the two sovereign services just character- 
ized, it devolves on money also : i To furnish a system 
of money denominations.^ ii Legally to make pay- 
ments and liquidate indebtedness.^ iii To be a stan- 
dard for deferred payments.^ iv To transfer values 
in space and in time.^ v To regulate, as a totality, the 
value of each unit of its mass.^ 

1 Not at all to be confounded with either of the greater functions. 
Thus, in English America before the Revolution, the money of account, 
viz., the colonial pounds, shillings, pence, and farthings, a different system 
from the English, neither exchanged nor measured values, but was a mere 
means of book-keeping. 

2 This, too, as Knies well points out, is something quite separate from 
the exchange-function. Governments might make corn or horses the legal 
means-of-payment, instead of money. 

3 As in case of all time contracts and transactions, and outstanding 
debts. This is logically and in point of time a secondary function of 
money, but, in modern business, hardly so in importance. See § 87. 

* Walker, Mo., 12, against Jevons, thinks this not an office of money as 
such. " When a commodity comes to serve as a store of value, it ceases 
to be money." This seems arbitrary. Money is often used thus. Hoarded 
silver dollars [1889], for example, do not drop to their bullion value. 
Notice that the use of money as a reservoir of value diff'ers from that of iii. 
It is true that when gold and silver are used as the form in which to send 
value abroad, they cease to be money. 



THE THEORY OF MONEY 1 37 

6 We see from § 83, iv, and § 87, that the total made up of money and 
unwrought money metal actually does have this effect, whether artificially 
manipulated or not. It is, indeed, one of the most significant of all the 
facts relating to money. 



§ 85 The Value of Money 

IValker, P. E., pt. iii, chaps, iii, iv. Mill, bk. iii, chaps, viii, ix. Perry, 241 sqq. 
Fawcett, Manual, 356 sqq. Dastiat, Pol. Econ., 202 sqq. McAdam, Alphabet in 
Finance, vi. Bilgrant, Iron Law of W.iges. Wagfier, Geld u. Kredittheorie der 
PeeVschen Bankacte; also in Zeitsch.f. gesam. Staatsw., 1881, 759 sqq. Nasse, 
in Schoenberg, vol. i, VII, x. Sidgwick, bk. ii, ch. v. Mangoldt, §§ 79 sqq. 

This, by which, observe, we do not here mean inter- 
est, but purchasing power, is regulated as in case of 
those goods whose supply is limited,^ almost entirely 
by the relation between demand and supply, cost of 
production rarely coming into the account, i Money 
behaves like a monopolized article without being such, 
viz., while remaining freely open to both additions and 
losses, ii The facts named at § 75, ii,^ render money 
more independent than aught else of all ordinary 
changes in demand and supply, iii Given money 
enough already to do all needed money-work, and the 
value of a country's money-total is wholly independent 
of its mass.^ iv The influence which bullion may exert 
in maintaining the value-parity^ between itself and 
coin, is not to be explained by supposing bullion to 
represent cost of production more nearly than coin, 
since of cost both are in equal degree independent. 
V If different portions of the money supply have unlike 
costs of production, the cheaper will not displace the 
dearer unless it is sufficiently abundant by itself to 
answer the demand.^ vi An alteration in the value of 
money may be nothing else but phase of a change in 
the values of general commodities.^ vii In determin- 



138 THE THEORY OF MONEY 

ing the value of money, paper money and all the other 
so numerous instrumentalities'^ of exchange, have, 
according to the amount of exchanging which they 
effect, the same influence as money proper. 

1 See § 65, end, 67. 

2 Most potent among those conditions is the vastness of the supply of 
money, and the uniquely broad and uniform demand for it, consisting in 
all salable commodities or services except money itself. 

3 After the point named is reached [Cernuschi, 'Nomisma,' 14], an 
important condition, overlooked in Mill's discussion, a greater total bulk 
of money vifill purchase no more than a smaller. Why, then, should any 
one longer produce precious metal? Because each new dollar, though 
theoretically less valuable than dollars vi^ere before, is worth as much as 
any old dollar is now. And from the point of view of society's interest 
it is well for the total to be as large as possible [§§ 75, ii, and 77]. 

* I.e., seigniorage being left out of view. Since 1875 [it tad previ- 
ously been | of i pr. ct.] the U. S. mint charges no seigniorage for coining, 
but the bringer of the metal must pay for the alloy. In England also 
there is no seigniorage proper, but a delay in furnishing the coins occasions, 
through loss of interest, a sUght practical seigniorage, giving coin usually a 
trifling excess of value over the metal it contains [Mill, bk. iii, ch. ix. § 2, n.]. 

5 Gresham's law [Sir Thos. Gresham, founder of the Royal Exchange, 
London, d. 1579] is true only with this Umitation. See Walker, P. E., 
142. It is usually quoted to the effect that poorer money will always 
drive out better. So Aristophanes, ' Frogs,' Frere's Tr., 893 sqq. [cited 
by Laughlin, Bimetallism in U. S.], 

" For your old and standard pieces, valued and approved and tried, 
' Here among the Grecian nations and in all the world beside, 
' Recognized in every realm for trusty stamp and pure assay, 
' Are rejected and abandoned for the trash of yesterday." 

In fact another modification of the law should be named. The people 
may refuse to handle the poorer, as on the Pacific coast during the civil 
war [H. George, Prog, and Poverty, bk. v, ch. i.]. Legal tende; paper 
would not circulate and gold was retained. 

6 See § 87. 

■^ On different forms of paper money, see § 80. The ' instrumentalities ' 
are checks, bills of exchange, promissory notes, due bills, book accounts, 
barter, post-office notes and orders, express orders, telegram and telephone 
orders, etc. 



the theory of money i39 
§ 86 Paper Money 

Walker, Money, pts. ii, iii. Noel, Le billet de Bangue [cf., same title, in Diet, des 
Finances]. Knies, Geld, xi. Wagner, Geld und Kredit. Mill, bk. iii, ch. xii. 
jfevons, Mo. and the Mech. of Ex., ch. xiii. Nicholson, Mo. and Mon. Problems, 
ch. vi. Mangoldt, §§ 58, 59. Papa d'Amico, Titoli di Credito surrogati della 
Moneta. Walras, Theorie mathematique de la richesse sociale, 145 sqq. 

To secure simplicity, this Chapter has thus far sup- 
posed the monetary material to be metal only. The 
same laws hold in the main for any system, i If, along 
with metal, surrogate ^ paper bills be put in use, the 
foregoing principles remain perfectly unmodified, con- 
venience and perhaps some economy in wear and loss 
the sole changes, ii If instantly and surely convertible 
notes not fully covered be introduced, the extra con- 
venience adds 2 somewhat to the entire number of 
dollars in circulation, this increment costing nothing.^ 
iii If there is in circulation promissory paper not con- 
vertible,'* it drives out more or less metal in proportion 
to its depreciation, the latter being great or slight 
according to a variety of circumstances, of which its 
amount and the issuer's credit are the chief. It will 
be seen that no one of these species of paper can 
entirely take the place of coin. Hence, to be scientific, 
we have to call paper currency partial or imperfect 
money.^ The failure to distinguish it from money 
proper leads constantly into the gravest errors of view. 
Paper, it is true, (a) is a medium of excliang-e, and 
(b) has value, which (c) is not in every case merely 
representative.^ Yet, i Paper has no universal pur- 
chasing power, since it usually'^ passes only in the 
country that utters it. ii It forms no final measure 
of value, but must itself be constantly measured, as to 
value, by coin, iii Its value is adventitious, not spring- 



140 THE THEORY OF MONEY 

ing from intrinsic cost, as is ultimately the case with 
gold or silver, but entirely from some operation of the 
principle of credit. 

1 Viz., bills covered dollar for dollar, like gold and silver certificates. 
Gold surrogates are issued not by the government alone but also by the 
clearing-house banks of N. Y. City. On the question of saving by the use 
of such paper, § 78, n. i. On the effect of paper money to increase the 
proportion of fixed capital, Walras, Rev. du droit internat., 1884, p. 587. 

2 In the figure, 

a h c d 



I i I I 

let the heavy line, xc, represent hard money, and the light one, ad, prom- 
issory paper. As the paper is launched, part of the hard money, say be, 
will leave the circulation, some going out of the country, some into the 
melting pot to be turned into wares and trinkets. See J. B. Say, as cited 
by Macleod, Elements, vol. i, 99; also Ad. Smith, bk. ii, ch. ii. 

3 Except, of course, what the paper costs. Barring the difficulty which 
it may occasion in a crisis, this part of the paper has in all particulars the 
identical effect of so much gold [Walker, P. E., 178]. Suppose it added 
just when a larger circulation was needed to do the required money work 
[§ 85, iii, and n. 3], it would be no less a blessing than the same amount 
of precious metal [§ i, n. 2]. Yet we do not deny the possibility of some 
local and temporary inflation in a mixed system of this sort [see § 91, 
and notes] . 

* Like U. S. greenbacks between 1862 and Jan. i, 1879. On non- 
promissory or fiat paper money, see § 93. Also see * Cours force ' in Say's 
£>ici. des Finances. 

5 Cf. § 74, n. I. 

6 Illustrated by government paper money [§ 80; cf. Farrar, Man. of 
the Constitution, 339]. If a greenback 'represents' property at all, it 
must be that which is to liquidate it by and by. This probably is not yet 
in existence. Of the bank bills now at par not 40 per cent in valup could 
be paid were all presented to-day. What do the 60 per cent ' represent ' ? 

■^ Yet Bank of England notes pass on the continent, as U. S. notes 
more and more do in Liverpool, London, and Paris. They are not, how- 
ever, accepted strictly as money, but with the idea of swift recourse, as 
bills of exchange. 



the theory of money i4i 

§ 87 Ideal Money 

Knies, Weligeld u. Weltmunzen. Nasse, in Schoenberg, vol. i, VII, v, § lo. 
Andrews, 'An Honest Dollar,' in Am. Econ. Ass'n Papers, vol. iv. Marshall, 
Rem. for Fluctuation of Gen. Prices, Contemp. Rev., vol. 51. Grosvenor, Prices, 
vol. i. Jevons, Investigations in Currency and Finance, II. Ricardo, Proposals for 
an Economic and Secure Currency. Wasserab, Preise und Krisen. 

The best monetary systems yet used are very imper- 
fect, permitting the most unhappy fluctuations in the 
purchase-power of their units, discouraging enterprise 
and robbing now debtors, now creditors.^ Bimetallism 
would relieve, yet only temporarily. The time must 
come when governments will be authorized (i) to watch, 
through competent commissions, for each rise or fall in 
the value of money (fall or rise of general prices), and 
(ii) to correct the same by expanding or contracting the 
circulation. Operation (i) is feasible by the critical 
summation, at intervals, of the prices of definite quan- 
tities and qualities of numerous staples,^ each having 
prominence in the result according to the amount of it 
consumed. If the sum as reckoned to-day exceeds the 
last one, prices have risen, the power of money fallen. 
A lessened sum will mean falling prices, dearer money. 
Operation (ii), the necessary contraction or expansion, 
may be effected in either of several ways, the best ^ of 
which, it is believed, would be to inject into or withdraw 
from a gold or a gold-and-paper circulation, the proper 
amounts of full legal tender silver tokens.* The gold 
and the silver should both be represented by certifi- 
cates. Such a system would invite if not necessitate 
international agreement, and might easily extend to 
all nations and ages. An international coinage 
would follow it, and cosmic money be at last realized. 



142 THE THEORY OF MONEY 

1 Nasse, in Sckoenberg, vol. i, VII, V, § 9. The precious metals vary 
enormously in value. [§ 83, i, n. 2.] According to Jevons, gold fell 46 
per cent between 1789 and 1809, rose 145 per cent between 1809 and 
1849, and fell again at least 20 per cent between 1849 and 1874. Since 
1874 it has risen once more, about 30 per cent. When money falls in 
purchasing pow^er [prices rise], debtors on outstanding contracts are 
wronged, receiving in the stipulated number of dollars less value than was 
covenanted. If money value rises [prices fall], creditors are wronged in 
the same way. Worse, economically, than this injustice is the disorder 
imported into business by such changes in the power of money [viz., in 
general prices]. Rising prices are wont to breed speculation: falling 
prices asphyxiate industry by making it profitable to hold on to, rather 
than employ, money and titles to money. 

2 The practical difficulty in making and using such a value-measure 
would be considerable. What are staples? How ascertain the consump- 
tion of any one? In averaging, shall we employ the arithmetical or the 
geometrical mean? No one of these questions has yet received final 
answer. But the simple addition, from time to time, of a carefully made 
and kept price list, disregarding variations of volume between the com- 
modities consumed, would disclose the rise, fall or stationariness of money 
with a close approach to accuracy. 

^ See Marshall, as above. The equity of a composite value-standard 
[Jevons, Mo. and the Mech. of Ex., ch. xxv] would be, by the plan sug- 
gested, incorporated in the money system itself, the only way it can ever 
be utilized. 

* Pieces [dollars, e.g?^ worth less than face value, yet passing at that 
value, viz., at the value of gold, because limited in amount [§ 85, v]. 
They should never be permitted on the one hand to become of full face 
value, nor on the other to be too cheap. The superiority of such subordi- 
nate money over paper would lie in its labor-cost value. In a panic, the 
metal tokens, nearly as worthful as gold, could be paid out on presentation 
of their certificates, when holders of mere uncovered paper would be 
helpless. Why our system would excel Ricardo's, see § 93, n. i. 



CHAPTER IV 

CREDIT 

§ 88 The Nature of Credit 

Mill, bk. iii, chaps, xi, xii. Knies, Kredit. Schraut, Organization des Kredits. 
Mangoldt, §§ 53 sqq. Papa d'Amico, Tiioli di Credito, pts. i, ii. 

i Credit in Economics is the power to command 
wealth or service now in exchange for some assurance 
of a return in future. It is, in general, the same as a 
power to market titles or to put in use any of the 
instrumentalities ^ of credit. It may be utilized or not. 
ii The main instrumentalities of credit are, (i) promises, 
as book-accounts, deposits, stock certificates, bonds, 
promissory notes, bank-notes, and (ii) orders, as post- 
office orders, bills of exchange, checks, circular letters 
and mobilizing certificates ^ of all kinds, iii Credit has 
value,^ and may also become capital, being among the 
most active producers of value,^ (i) utilizing small 
sums and savings,^ (ii) transferring capital from less 
to more productive hands, (iii) supplying a powerful 
motive for the accumulation of capital, (iv) making 
possible enterprises too great for individual resources. 

^ ' Instrumentalities ' rather than ' instruments,' to cover cases of orders 
and promises by telegram and telephone. 'Titles ' or ' instruments ' would 
cover only paper documents. According to one's purpose, credit may be 
classified as public or private, as personal or real, as mobilier [based on 
personal property] ox fonder [on real estate]. 

2 Pipe line [petroleum] certificates vi'ell illustrate these. Each is an 
order upon given holders of oil to deliver such or such an amount to the 



•144 CREDIT 

bearer on demand. Pig iron, whiskey, and other bulky wares are in the 
same way 'mobilized,' viz., put upon the speculative market. The certifi- 
cates are like dock warrants, except that the latter are not intended to be 
negotiable [cf. § 55, n. 8, § 78, n. 2]. 

3 This does not mean either (i) that rights, embodied in titles, are the 
essence of wealth [Macleod, followed by Minton, in Capital and Wages], 
or (ii) that property and titles to the same property are both to be reckoned 
into the community's wealth [§ 2] ; but that the fact or system of credit 
is an economic advantage. As such it is valuable [§ 61], however it 
originates, and it is ivealth [§ i, and n. 3] and capital [§ 28] so far as it 
comes under the respective definitions of these categories. With Knies 
\_Pol. Oek. 215], against Wagner, we decline to rank under capital, titles 
as a class, but it is hard to see why the notes referred to at § 86, n. 3, are 
not at once vs^ealth and capital. Value in exchange is of course an attri- 
bute of all such papers, unless worthless. 

* " Credit has done more, a thousand times, to enrich nations, than all 
the mines in the world" [Webster, in speech for re-charter of U. S. Bank, 

1834]- 

^ The savings banks of America contain ^12,000,000 or ^14,000,000, 
nearly as much as all other banking institutions in the country. Most of 
this, as well as much of the capital in the hands of building and loan 
associations and co-operative banks, is an aggregation of trifling amounts. 



§ 89 Credit and Crises 

Roscher, ' Zur Lehre der Absatzkrisen,' in vol. ii, of Ansichten. Wirth, Gesch. 
der Handelskrisen. Mangoldt, § 61. Cairnes, Leading Principles, 179 sqq. 
Yves Guyot, Sci. Econoniigue, bk. v, ch. iii. H. C. Adams, Public Debts, 
207 sq. McAdam, Alt;habet in Finance, xvii. 

Credit has its disadvantages also, (i) promoting 
indebtedness on the part of the poor, (ii) sometimes 
transferring wealth from more to less productive hands,i 
(iii) sometimes unduly stimulating demand, thus rais- 
ing prices and introducing commercial panics. This 
occurs because credit possesses the same purchasing 
power as money itself, and people with credit purchase 
too much. Demand, losing all relation to amount of 
true money and permanent property, inflates prices. 



CREDIT 145 

which in turn stimulates exchange, creating new de- 
mand for credit, and indefinitely multiplying all forms 
of indebtedness, until, at length, the discreet decline to 
give credit further, and the crash comes.^ This, in 
general, is the course of a business crisis. 

1 Apt to be the case in public borrowing. See the masterly discussion 
in Adams, Public Debts, esp. pt. i, chaps, iv, v. All the great woiks on 
Finance treat this. 

2 How far this evil is possible in case the government and all banks of 
issue continue to cash their notes on demand, see § 91. As a matter of 
fact, specie payments are at such times usually suspended. Besides credit- 
crises we have crises from mere lack of money, and crises from [specific] 
over-production. 

§ 90 Further Abuses of Credit 

Rae, ' Natural Hist, of Credit,' Contemp. Rev., vol. 50 [1886]. U. S. Consular Reports, 
No. 43, July, 1884. 

From 70 to 90 per cent of the world's business is 
done on credit. In Germany, Siam, and Canada the 
proportion is 90 per cent, in Belgium and China, 80. 
Credit-traffic has its feeblest development in Holland, 
its strongest in Turkey and Yucatan. Credit may be 
a necessity of life, therefore a sign of poverty, or an 
instrument of production and hence a mark of wealth. 
The difference lies mainly in the degree of its organiz- 
ation, which is higher for any nation in proportion to its 
industrial advancement. With progress in economic 
organization, the sphere of credit becomes less exten- 
sive, its operation more intensive. Cash payments, 
getting the mastery first in wages, in retail trade and 
in raw products, spread gradually over other fields, 
shutting up credit to its most helpful and least danger- 
ous functions.^ Latest to be overcome are unwise 



146 CREDIT 

plans, stimulated by its immense undoubted advantages, 
for the use of credit in exchange. Of these, the three 
which follow deserve the most consideration. 

1 The assumption which so many have taken up from Bruno Hildebrand, 
of three great periods in the world's economic evolution, viz., barter, 
money, and credit, as if credit were to have its fullest development in the 
most perfect economic state, is now seen to be false. With nations as 
with individuals, those best able to get credit use it least. In all the 
wealthiest countries the proportion of cash payments to total Volame of 
trade is steadily increasing. 

§ 91 Free Banking 

' Free Trade in Banking,' Westm. Rev., Jan., 1888. Wagner, Geld und Kredittheorie 
der Peel'schen Bankacte. Walker, P. E., 178 sqq. ; Money, pt. iii. jfames, 
' Banks of Issue,' in Lalor. Horn, ' Banks,' ibid. Wesslau, Rational Banking. 

Many theorists have advocated that incorporation for 
banking purposes be as free as for other, and that 
every bank, like every private individual, be permitted 
all the credit it can secure, with the privilege of util- 
izing the same in uttering bills for circulation, to be 
used in discounting, leaving the receivers and holders 
of the bills to look out for the security.^ But experi- 
ence, notably that of the United States from 1814 to 
1863,^ has shown that such a plan is nearly certain to 
put into circulation vast amounts of poor bills, swin- 
dling the unwary and the poor,^ driving hard money 
from circulation, raising and distracting prices, and 
provoking and aggravating commercial crises. It is 
believed that such unhealthy inflation may occur, at 
least locally, even when no bills are legal tender and 
all are instantly convertible.^ 

^ " As long as the bank is bound to honor its obligations just as any 
other debtor, and redeems its notes in specie upon presentation, the public 
will be able to determine its solidity, and consequently measure its credit. 



CREDIT 147 

An excessive issue of notes will cause these notes to flow back into the 
bank and thus correct itself" Horn, [as above, p. 236]. 

2 During this period probably 5 per cent of the entire circulation averaged 
to be lost annually. Walker, P. E., 177. 

3 The acceptance of the notes may be to a certain degree compulsory 
although they are neither legal tender nor irredeemable. They may form 
so great a part of the circulation that people have to accept them for lack 
of other media of exchange. The poor are never in condition to refuse 
what is offered them as money, even when not too ignorant to suspect it. 
Many receivers are sure to be remote from the place of redemption. See 
James, as above, p. 245. The government must, he says, i) not make the 
notes legal tender, or anywise artificially favor their circulation, ii) forbid 
the issue of too small denominations, and iii) see to it that convertibility 
is real, and not made illusory by any unfair practices. The bank notes of 
small denominations are the most vicious as traps for the poor. 

* The question how far government should supervise banking is closely 
bound up with that between the ' banking principle,' to the effect that, if 
perfectly convertible, paper changes in no particular the behavior of the 
money system to which it belongs from what it would be if composed of 
metal alone [Walker, P. E., 178. Cf. § 86, ii, above], and the 'currency 
principle' [Walker, P. E., 179], according to which convertibility is no 
sure guaranty against local and temporary inflation. Wesslau, with Wagner 
and most European economists, favors the 'banking principle,' Walker 
the 'currency principle' [P. E., 190]. 

§ 92 The John Law Theory 

Bilgrant, Iron Law of Wages. Perry, 292 sqq. Horn., ' Banks,' in Lalor. White, 
Paper Mo. Inflation in France. Sybel, French Revolution, vol. i, ch. iv. Nicholson, 
Mo. and Men. Problems, pt. ii, i. Blanqui, Hist, of P. E., ch. xxxi. Bryant and 
Gay, U. S., vol. ii, ch. xxii. Thiers, Mississippi Bubble. Whately, Kingdom of 
Christ, 171 sqq. Alexi, John Law u. sein Systetn [cf. Vierteljahrsch. f. Volksiv., 
xxn, ii, 230 sqq.] . Rondel, Mobilisation dii Sol ejt France. 

This maintains that bills may be put forth not only 
in lieu of gold and silver, but also in lieu of all values,^ 
and hence, if called for, may be issued to the whole 
extent of the property of the issuer, such currency 
being a self-regulating machine, which, if left to itself, 
will adapt its volume to the public needs. But, (i) paper 
uttered against anything else than coin or bullion, not 



148 CREDIT 

being instantly convertible into coin, cannot long re- 
main at par, and (ii) having depreciated and raised 
prices, ceases to toe self-regulating in volume, and 
goes on inviting further issues. 

1 A predecessor of Law was Francis Cradocke, publisher, in 1 661, of 
'Wealth Discovered' [Quar. Jour. Econ., vol. ii, 485 sqq.]. Law said: 
" 5 oz. of gold is equal in value to ;^20, and may be made money to that 
value; an acre of land is equal to ^20, and may be made money equal to 
that value, for it has all the qualities necessary in money " [Perry, 293]. 
Mr. Hugo Bilgram, in the pamph. named above, presents the same theory, 
recommending its application as a means of economic justice. Law's 
bank, which ran from 1716 to 1720, did not realize his principle with any 
exactness, but [at last] printed and marketed paper money practically 
regardless of security. Its shares, which had risen from the par, ;i^500, 
to ;^i 8,000, and its notes, at one time better than gold, became valueless. 
In the final ' run ' upon the bank, 12 persons were crushed to death. Truer 
to the theory were the ' assignats ' issued by the Revolutionary government 
in 1790, 1,200,000,000 francs face value in all, based upon confiscated 
church lands. They were legal tender, and receivable for lands at any 
public sale. By June, 1793, they had fallen to 83 per cent of par; by 
Aug., to 16 per cent. They finally stood at f of one per cent. The 
' matidais,^ immediate titles to lands, were issued to redeem the assignats, 
I in tnandats for 30 in assignats. But, though their total face value was 
less than the value of the lands, after rising from 16 per cent of par to 40 
and 80, they soon sank again to 5. Joined to Law's bank was the * Mis- 
sissippi Co.' or ' Western Co.,' which had a monopoly over Louisiana, and 
owned a tract of land 12 miles square on the Arkansas River. Collapse 
of the bank did not destroy the colony, though the settlers, mostly Ger- 
mans, came down to the Mississippi near New Orleans, peopling what is 
still known as the ' German Coast.' Rondel's book defends the assignats. 

§ 93 Fiat Money 

Ricardo, as at § 85. Knies, Geld, xi. Walker, P. E., 153 sqq., also pt. vi, ch. viii. 
Hume, ' Do we Need a Metallic Currency,' Forum, May, 1886. McAdam, Alphabet 
in Finance, xi. Prince-Stniih, Uneinlosbares Pap. Geld, etc., in Vierteljahrsch. 
f. Volkswirtsch., 1864, iii. 

A school of monetary writers, inspired by certain 
teachings of Kicardo,i would repudiate all specie basis 



CREDIT 149 

for currency and make government the sole issuer of 
it, the notes, full legal tender but strictly limited in 
anioiint,^ to be convertible into bonds, and the bonds 
redeemable in the notes. The plausibility of this 
scheme to the popular mind lies in the fact that legis- 
lative acts may and often do in some sense create 
value, as when a precious metal, not so before, is de- 
clared to be money and legal tender.^ But its logic 
resides in the principle of limitation to the circulation, 
and in the idea that, so long as the total money consists 
in precisely enough dollars to do the work, additions 
beyond this being wholly impossible, the value of the 
dollars has no connection with the cost of the material 
from which they are made. Could the conditions be 
strictly fulfilled the system would probably work.* 
We believe this, in any society hitherto known, out of 
the question.^ Perception that the notes were abso- 
lute, not promissory, must awaken distrust of them, 
leading to depreciation and to larger use of bullion, 
barter and all forms of credit. This would augment 
the depreciation, and the new depreciation this, so by 
degrees deranging values beyond hope. 

1 Ricardo, however, proposed to continue gold as the standard and 
measure of value, only using paper as the medium of circulation [§§ 82, 
83]. He would so limit the amount of paper as to conform its value- 
fluctuations to those of gold. Most fiat money men [greenbackers] at 
present abjure this guaranty. Ricardo has emphasized as strongly as any 
one the indispensableness of some standard by which the value of money 
shall be gauged. Without this the whole system is in the air. Suppose 
we tried to limit the circulation, by what criterion could we determine how 
or how much? Men fail to feel this difficulty because, applying in thought 
to their proposed fiat system the denominations of our present promissory 
one, they lose sight of the difference between the two. Let the bills not 
contain the word ' dollar ' but bear the mere legend : " This is one 



150 CREDIT 

Kehoe," " This is ten Kehoes," etc., and the character of a no-standard 
system becomes plainer. Even Ricardo saw no way to regulate the standard 
itself, as suggested in §§ 70 and 87. Variations in the value of gold he 
considered wholly irremediable. 

2 According, that is, to the soberer theorists of this class. Many little 
regard any necessity of limitation. 

^ Thus, all admit that, should the commercial nations resume the free 
coinage of silver, this metal would advance in value. It rose somewhat 
by the [Bland] Act of the U. S. alone [1878], ordaining the coinage of 
at least ^2,000,000 worth and at most ^4,000,000 worth monthly. The 
cause was simply the enlarged demand. Nearer to a creation of value by 
fiat is the phenomenon described at § 86, ii, and n. 3. Now, if value is 
thus imparted to gold, it is asked, why not to paper, and if some value, 
why not more? The answer is that the suggested parallel between gold 
and paper is precise. Paper will, by being made money on the basis 
proposed by this plan, appreciate in proportion to the wider market thus 
opened for it, but no further. A 'fiat' dollar would in time be worth 
precisely the [engraved] paper contained in it. See note 5. Another 
fallacy lurks in the idea that the uttering of paper money is analogous to 
the coining of precious metal, and proper function of government simply 
on that account. 

* This does not contradict the admission, at § 85, that money's cost of 
production is at present the ultimate regulator of its value. 

^ The necessary confidence between man and man, and in the wisdom 
of government's action, could not be engendered. Even the fact that the 
notes were legal tender and receivable for customs and taxes would not 
quiet all concern. The state itself may fall. The minutest degree of such 
distrust would introduce more or less of the ancillary media of exchange, 
which it would be wholly beyond the state's power to prevent. 



CHAPTER V 
the clearing system 

§ 94 Settlements by Check 

Lloyd, ' Clearing,' in Lalor. Jevons, Mo. and the Mech. of Exchange, chaps, xx-xxii. 
Rauchberg, Neueste Entwickelung des Clearing U7id Giroverkehrs, Statist. 
Monatsschr., June, 1887. Fratiqois, Clearing Houses ei Chambres de Coin- 
petisatioft. 

A vast majority of inland payments are made by 
checks, each debtor sending his creditor, however far 
away, a check or a draft on the bank with which he, 
the debtor, deals. Such a check, unless happening to 
reach the drawee bank directly, or (in a very small town) 
its neighbor bank, finds its way back to the drawee 
bank through some kind of a clearing institution. The 
clearing will occur at a local clearing-house, or the 
check have to pass through the national one,^ accord- 
ing to the location, banking relations, etc., of the 
parties to the transaction. 

1 The following diagrams illustrate all this. 

I Single City System 

[say] Providence 

ABCDEFGH I 

\|/ \|/ \|/ 
1st Nat'l 2d Nat'l 3d Nat'l etc. 



Providence 
Clearing House. 



152 



THE CLEARING SYSTEM 



If Mr. A [or B, or C], who banks with the ist National, wishes to make 
a payment to Mr. I [or G, or H] , whose account is with the 3d [or to D, 
E, or F, deahng with the 2d], he draws a check upon his own bank, the 
1st, bidding it pay to the order of Mr. I the desired sum. I turns in this 
check to his bank, the 3d, which gives him credit [or cash] therefor, and, 
at the clearing house, swaps it for a check or checks drawn on itself but 
handed in at the ist. If the amounts, in checks, between any two banks 
do not matph, the balance is paid in cash. 

II The National System 



PROVIDENCE 

A B C D E F 

\|/ \|/ 

istNat'l 2dNat'l 

Bank Bank 



NEW ORLEANS 

G H I J K L 



3dNat'l4t>iNat'l 
Bank Bank 



MN O P Q R 

\|/ \|/ 

5th Nat'l 6th Nat'l 

Bank Bank 



SAN FRANCISCO 

S T U VWX 

\|/ \!/ 

7th Nat'l 8th Nat'l 
Bank Bank 




NEW YORK 




CLEARING HOUSE 





Metropolitan 



Chemical 



Stuyvesant 



Manufacturers 




New York 
Clearing House 



Suppose Mr. B [or A, or C] of Providence is indebted to Mr. X [or V, 
or W] of San Francisco [or to any one in N. Orleans or Chicago]. B, 
having a deposit with the ist National in his own city, writes a check upon 
that bank, requesting it to pay the sum to X or his order, and sends this 
paper directly to X. The latter turns it over to his bank, the 8th National, 
in San Francisco. It is credited to him, and forwarded, as a debit, not 
directly to Providence, but to some bank in N. Y. This may possibly be 
in communication with the ist National, of Providence, in which case the 
check is forwarded to its destination directly. Otherwise, unless itself one 
of the [about 60] banks of the metropolis in immediate relation with the 
clearing house [clearing house banks], the N. Y. bank first receiving it 



THE CLEARING SYSTEM 1 53 

passes the check to a bank which is thus connected. In the clearing house 
it falls, through another debit and credit operation, into the hands of a 
clearing house bank which does business with some Providence bank, 
perhaps the ist National itself. The grand circuit completed, and the 
1st National having debited the amount of the check to B, the latter's 
account with X is closed, not a dollar in cash having been used [save 
for clearing house balances]. The N. Y. clearings for i88l were 
^48,565,818,212. See also the following figures, for 1884. 

New York Clearing House 

Clearings for the week ending May 3 $855,71 1,696 

Clearings for the week ending April 26 707)078,332 

Clearings for the week ending April 19 652,880,160 

Clearings for the week ending April 12 576,804,205 

Clearings for the week ending April 5 690,816,01 1 

Clearings for the week ending March 29 610,332,765 

London Clearing House 
Return of Paid Clearings for the week ending April 23, 1884. 

Thursday ;ifi7,i72,ooo 

Friday 16,920,000 

Saturday 15,345,000 

Monday 15,905,000 

Tuesday 13,463,000 

Wednesday i5,S33.ooo 

Total ;^94»338.ooo 

In the corresponding week of 1883 the total was ;^98,078,ooo. 

Paris Clearing House. 

Dec, 1887 397.897.335 francs. 

Nov., 1888 • 448,524,956 francs. 

Dec, 1888 488,916,294 francs. 

§ 95 International Payments 

GoscHEN, Theo. of the Foreign Exchanges, Ad. Stm'tk, bl<. iv, ch. iii. Macleod, Theo. 
and Prac. of Banking, vol. i, ch. viii. Mill, bk. iii, ch. xx. ' The A B C of the 
Export Bus.,' Northwestern Miller, Jan., i88g. 

Imports are, as a rule, paid for not by bullion but by 
bills of exchange 1 drawn on the importing countries 



154 THE CLEARING SYSTEM 

and sold to brokers. There are^ (i) time and sight 
bills, (ii) commercial and bankers' bills, (iii) direct and 
indirect bills, and (iv) accommodation and true bills. 
If New York is importing more from than exporting 
to London, bills on London bear a premium in New 
York, and bills on New York are at a discount in 
London. When this occurs, exchange and balance of 
trade are said to be * against' New York.^ If bills in 
neither country bear either premium or discount, ex- 
change is said to be at par. The par will be the 
weight-relation between the unitary coins of the two 
nations.* If the premium attains a higher per cent 
than the cost of the freightage and insurance of gold,^ 
gold will be sent to pay debts ; but this soon cures the 
necessity for it, by lowering prices and increasing 
exportations.^ 

1 International checks or drafts. Several cases may arise, i A, in N. Y., 
both an importer and an exporter, owing B, in London, draws on his debtor 
C, in London, and sends the draft to B, who collects of C. ii A, of N. Y., 
exports to B, of London, and C, of London, to D, of N. Y. B buys of C a 
draft on D, and sends it to A, who collects of D. A and C are thus both paid 
without shipment of money, iii Two brokers, one in N. Y. and one in Lon- 
don, agree to honor each other's drafts. A, of N. Y., owing B, of London, 
buys of the N. Y. broker a draft on the London broker and sends it to B, 
in London, who collects from the Londoner, iv The world's clearing 
house is London. If a N. Y. merchant wishes to pay a debt in Italy he 
buys a draft on London and sends it to his Italian creditor, who gets the 
cash on it from Italian brokers in correspondence with London. Thus 
we are not obliged to have direct exchanges with every country, but the 
majority of exchanges are effected through the one great centre. 

2 Goschen, ch. iii. The ' time ' allowed for the payment of bills not 
cashed at sight is usually 30 days, but may be 60 or 90. Time bills are 
cheaper than sight bills, in a proportion determined by the rate of interest 
in the drawee country. Banker's bills are simple international checks, 
such as a traveller might purchase on going abroad. Commercial bills are 



THE CLEARING SYSTEM 155 

those which a shipper draws upon his consignee against merchandise 
shipped, each accompanied by a bill of lading, 'to order,' covering 
the property against which it is drawn. This is called ' documentary ' 
exchange. To illustrate indirect bills : from Hong Kong for tea to N. Y. 
the exporter draws on London instead of N. Y., and the London house 
charges to N. Y. This item often settles the state of exchange between 
two countries [Goschen, p. 32]. One day in Aug., 1882, 3,200,000 Marks 
[$800,000] went from Hamburg to London, to pay for wheat shipped from 
N. Y. to Hamburg. Bremen merchants used to settle for N. Y. tobacco 
by bills on London in favor of N. Y., and, to offset these, buy up bills on 
London, from Dutch cattle and butter dealers. Bombay even now, in 
getting pay from Bremen, draws on London against Bremen. Accommo- 
dation bills are like drafts on a bank when it does not owe you [Goschen, 
37 sq., Macleod, Elem. of P. E., vol. i, 403. Cf. below § 96, v, and n. 4]. 

^ It seldom happens that the mutual debts of two countries exactly 
balance. Then, by a terminology now well understood but originating in 
a mercantilist error [§ 7, n. 5], exchange is said to be 'in favor of the 
country owing the less, and ' against ' the other. Speaking generally, the 
following phenomena will all arise together and be phases of one and 
the same state of exchanges, viz. : preponderance of exports, favorable 
balance or exchange, tendency to import gold [or actual importation], 
good time to buy exchange. Also the following: preponderance of 
imports, unfavorable balance or exchange, tendency to export gold [or 
actual exportation], bad time to buy exchange. The expression, ' exchange 
favorable to America,' does not mean that it is favorable to American bill- 
sellers, exporters, etc., but to hiW-buyers. 

* Exchange is at par between N. Y. and London, when, in one city, 
I can buy, for a given weight and fineness of gold, the right to have, in 
the other so soon as communication can be had, the same weight and fine- 
ness delivered to me or my representative. The par of £1 is ^4.866; of 
I Mark, $0.2478!; of 4 Marks, $0.9915; of I Guilder, $0.40; of i franc, 
$0.19305^^; of 5 francs, $0.9652552^5.; of I Florin, $0.4788335^2.9^. 

' Usually, the premium can go no higher or lower than the figure neces- 
sary to cover this cost. Not so in a great panic. When Napoleon left 
Elba [§ 96, n. 5], continental exchange in London rose to 10 per cent, 
much more than enough for transportation and even war insurance. Gold 
normally begins to move from London to N. Y. when London exchange 
in N. Y. is at $4,842, and back again when it is $4.90. But see next §. 

6 See § 76. 



156 the clearing system 

§ 96 Special Modifiers of the Rate of 
Exchange 

Goschen, Foreign Exchanges, ch. iv. Macleod, as at § 95. 

i All monies of a country laid out albroad,i as by 

purchase of ships or armaments, foreign travel, interest 
on bonds held abroad, or principal for the liquidation 
of these, tend to turn exchange against that . country. 
ii On the contrary, all foreign monies brought into 
your country ^ tend to set exchange in its favor, as the 
expenditures of travellers from abroad, or a loan effected 
or bonds sold there, iii Ocean carrying ^ by the ships 
of any country likewise turns exchange in favor of that 
country in relation to the country or countries for which 
the carrying is done. A country like England, con- 
taining a great commercial entrepot, as London is, will 
also secure favorable exchange for itself by the receipt 
of commissions, iv Draft on, and payment in, London, 
of many indirect bills against New York, might set 
English exchange against New York, coincidently with 
a preponderance of American exports to England. 
V As the balance of trade shifts from one side to the 
other, shrewd brokers,* not to incur the double expense 
of exporting and soon importing again, let their accounts 
run till naturally balanced, diminishing thus the 
average cost of exchange, vi Large merchants, who 
can readily extend the time of their transoceanic debts 
by paying interest, if exchange is high, wait for it to 
fall and then buy drafts. Rates are thus kept from 
going either so high or so low as they otherwise would.^ 

I It is estimated that ^86,000,000 go from the U. S. to Ireland yearly, 
in aid of distress and agitation there. 



THE CLEARING SYSTEM 1 5/ 

2 Thus, in Jan., 1883, though exports from America increased, foreign 
exchange did not go down in N. Y., because Englishmen were investing 
vast amounts of money here. 

3 The Cologne Gazette computes that Germany averages to pay England 
^2c;,ooo a day in ocean freights and bank commissions. The immense 
ocean carrying trade of England, having the effect of so much exportation, 
explains in large part why the balance of trade is always apparently against 
that country. This and other items account for the fact that no country's 
imports and exports for a given period ever appear to balance. For 
the 5 years, 1880-1885, exports from the U. S. exceeded imports by 
^^623,000,000; from 1876 to 1880 the excess reached ^921,000,000. Total 
in 10 years, ^1,544,000,000. What became of this vast balance? Net imports 
of specie for the same years account for only about $50,000,000. Some 
of it went to settle the balances against us of previous years, some to pay 
freight. Another portion was required for the interest and principal 
of foreign-held debts. But were all these and such causes away, the 
account would hardly ever seem even, owing to the different scales of 
valuation for imports and for exports. In fact, as, in trade, we prize more 
what we get than what we give, perfectly truthful figures would make 
exchange seem against us just in proportion as it was really the reverse. 
See Thorold Rogers, Econ. Interp. of Hist., 97. 

* Pairs of brokers, that is, one in one country, the other in the other. 
Bills on the country with an unfavorable balance would then be ' accommo- 
dation bills ' [§ 95, and n. 2]. 

^ Many more such modifiers might be named. Exchange drawn upon 
a country engaged in or threatened with war is always high, owing to the 
risk [§ 95, n. 5]. If the money of any drawee country consists of depre- 
ciated paper, or of coins deficient in weight and fineness [§ 81, n. 6], 
exchange is below par. That is, a paper giving you the right to so many 
units of that country's money, can be gotten for a sum of the money of 
your country, which is less than an equivalent, nominally, of the sum 
drawn for. Degradation of your own money has an effect precisely 
opposite. Before the adoption of our constitution, $4,444 in [Spanish] 
American money was the established custom-house equivalent of ;i^i. By 
1S37, deductions from the value of the dollar necessitated $4,866 as the 
equivalent of £1, an advance of just 9} per cent upon $4,444. Still it 
long remained habitual to reckon on the old basis of exchange, stating it 
as at 9.} per cent premium when it was really at par [' Dollar,' in Am. 
Cyclop., at end]. 



Part IV 



DISTRIBUTION 
CHAPTER I 

THE NATURE OF DISTRIBUTION 

§ 97 General Statement 

Sidgwick, bk. ii, ch. i. Leroy-Beaiilieu, Essai sur la Repartition dtt rickesse. 
Mangoldt, bk. iv, chaps, i, ii. Mill, bk. ii, ch. i. Patten, Premises of P. E.; Sta- 
bility of Prices [Am. Ec. Ass'n Papers, vol. iii]. Schoenberg, vol. i, XI. H. George, 
Prog, and Poverty, esp. bk. iii. Hertzka, Gesetze d. soc. Efitwickelung. Cher- 
buliez, bk. iii, chaps, i, ii. 

Distribution, as a rubric in Economics, is that sub- 
stantive ^ department thereof which canvasses the 
problems, into wliat bands the wealth created by 
production proper and exchange would naturally ^ fall, 
and on wbat principles, also wherein and why actual 
fortunes differ from those which strict economic causes 
would assign, — all of them important inquiries, to which 
economists have given relatively too little attention. 
It must not be assumed^ that the shares hxed by 
natural or economic laws are therefore certain to be 
just. Whether, or how far, they are so is still a 
question, among the most vexing connected with the 
science. 



THE NATURE OF DISTRIBUTION 1 59 

1 Sidgwick, pp. 25, 31, adverts to the new attention which this part of 
Economics has received since Ad. Smith. Till quite recently, in fact, it has 
been too much the habit of economists to treat Distribution as incidental, 
laying all stress on Production. The Professorial Socialists [§ 13] have 
nobly rebuked this. 

2 Mill, in his distinction [bk. ii, ch. i] between production as a natural 
process, and distribution as artificial, cannot mean that the latter is wholly 
given up to whim and custom. This would certainly be an error. But 
relatively arbitrary influences confessedly play here a great part. 

3 Sidgwick, 498 sqq. Cf. all the socialist writers. The assumption is 
made by orthodox economists almost to a man — a source of infinite con- 
fusion in their discussions. There is no necessary sacredness to mere 
operations of nature. Many of them it is the work of reason and civiliza- 
tion to correct. Progress largely consists in this. H. George, in saying 
[Social Problems] " The just distribution of wealth is manifestly the nat- 
ural distribution of wealth, and this is that which gives wealth to him who 
makes it, and secures wealth to him who saves it," cherishes a purely a 
priori notion of ' natural.' So does Giddings [Mod. Distributive Process] 
in calling ' natural ' that rate of wages which secures the highest productive 
power. These ideas are nevertheless very wholesome. 



§ 98 Categories and Shares 

IVaiker, P. E., pt. iv, ch. i. Crehore, Quar. Jour. Econ., vol. ii, 361. Webb, ibid., 
188 sqq., 469 sqq. Mangoldt, §§ 85-95. 

The net product of a people's industry for a given 
natural period, viz., the increment to wealth which 
remains ^ after making good the stock present at the 
outset, finds its way into flve^ theoretically separate 
categories,^ determined thither by special causes. 
I The permanent monopolist of any material neces- 
sary to production receives rent in virtue of his pro- 
prietorship, II The capitalist, interest, for the same 
reason, plus abstinence, III The laborer, wages, for 
his toil, IV The undertaker, profits, for the use of 
his ability to organize and superintend,^ and V The 



l60 THE NATURE OF DISTRIBUTION 

anomalous recipient, anomalous fortune, for a variety 

of reasons, often excessively hard to analyze.^ 

1 The strict ' dividend ' would of course embrace, what we here omit for 
the sake of simplicity, the products [including services] enjoyed in the 
course of the period. These seem to follow the same law as the rest. 
'Net product' does not exclude all costs of production [§§ 47,48], but 
only the wealth used up or worn out. It includes what goes for interest, 
wages, profits. See following Chapters. On the nature of national income, 
Mangoldt, as above, is best. It may be gotten at by summation of par- 
tKyAdiX products or of particular incomes. With either method, much care 
is needed to exclude error. In general, a nation's income is simply the 
total proceeds of its own and its subjects' industries. But it may also 
receive tribute, indemnity, or interest from another nation, or enjoy a per- 
manent net advantage over others in foreign trade. 

2 If, in a large and developed society, we look at any single industry 
by itself, a sixth category appears, viz., the general public, embracing the 
beneficiaries of all the five categories of every business aside from the one 
in question. In other words, the people immediately interested [as win- 
ners of rent, interest, wages, or profits] in cotton manufactures [either at 
a given factory or in general] are not the only ones interested. Through 
exchange [§§ 53, 54], it disseminates advantage everywhere, in more or 
less perfect return for its own extra profitableness in consequence of so 
great a market [§ 31, esp. n. 4]. It is obvious, however, that when the 
whole round of the industries is taken together, this extra category must 
in effect dissolve and disappear by a process of mutual cancellation. 

3 On Method in Distribution, or the logical order of its topics, George, 
Prog, and Poverty, bk. iii, chaps, i, vii. 

* The words express but very inadequately the real nature of the under- 
taker's office. See Chapter V. On the close analogy, identity even, be- 
tween the principle of rent and that of profits, see §§ 103, 119. 

^ The pupil must not expect satisfactorily to understand this § apart 
from the two following, and not exhaustively until the remaining Chapters 
in Distribution have been studied. The subject is complex, and cannot 
be truthfully expounded in the cursory and apparently simple manner 
hitherto so common. Observe, too, that upon many matters touching dis- 
tribution authors are still divided and scientific opinion now in the process 
of formation. Its trend we propose to indicate in our sketch, referring for 
fuller light to the latest and best literature. 



THE NATURE OF DISTRIBUTION l6l 



§ 99 Blending 

Same authh. as at § 97. 

While these functions and categories are really dis- 
tinct and scientific analysis demands their separation, 
two or more of them are usually represented in one 
person, who thereby participates in the product under 
a plurality of titles.^ Thus the small farmer, owning 
and himself working his capital and land, unites them 
all. A socialist community, viewed as a whole, would 
do the same. All laborers save the lowest receive, 
besides wages in the narrowest sense, earnings on intel- 
lectual capital, as well as profits or rent of ability.^ 
In a society of low industrial organization, to a large 
extent in America even yet, capitalists are also under- 
takers, and vice versa^ In England these functions 
coincide more with classes, which has hitherto been the 
general tendency of industrial advance everywhere.* At 
present, however, both capitalists and undertakers more 
and more derive gains from monopoly. 

1 That is, we do not here have in view so much different classes of 
human beings as different industrial functions and their workings. See, 
more fully, §101, 

2 See §§ 103, 121. 

3 In any joint stock undertaking each participant may be regarded as 
at once capitalist and undertaker, since the whole stockholding body is 
both. Every stockholder of course owns part of the capital : he also, at 
least indirectly, by voting upon directors and policy, has weight in man- 
aging the business. 

* Now counteracted and negatived, somewhat, by the movement toward 
Socialism. See Webb, Socialism in England, Papers of Am. Econ. Ass'n, 
vol. iv. WTiether, and if so, how far, this movement is healthy, perhaps no 
man living is wise enough to say. 



l62 the nature of distribution 

§ 100 The Law of Equal Returns to Last 
Increments 

Webb, ' Rate of Interest and Laws of Distribution,' Quar. Jour. Econ., vol. ii. 

According to the pure theory of economic distribu- 
tion, presupposing omniscience and the perfect mobil- 
ity of the various means of production both to prevail 
throughout an industrial community, competition, in its 
effort to secure the maximum utility for given sacrifice, 
would so dispose and arrange capital, skill, and human 
energy, that the last application of any one of them at 
any point or in any way, would evoke as great a return 
per unit of the factor applied, as the last apphcation made 
elsewhere or in any other way. And in actual fact, 
competition, though imperfect, is sufficient to maintain 
a constant tendency to the realization of this law.^ 

1 In agriculture, e.g., the operation of the law of diminishing return 
[§ 34] prevents all workers from concentrating at the same point, while 
each new comer will seek to work at the most advantageous point aH things 
considered. There must be theoretically, at any time, a certain arrangement 
of labor, skill and capital upon the land, which will get from it the maximum 
of utility. That ideal order may never be actually reached, but so far as 
self-interest prevails, and is enlightened, there cannot but be a steady 
approximation thereto. Skill, capital, and labor, as well as land, will be 
put in requisition according to the same law. Webb, as above, p. 194. 

§ 10 1 The Other General Laws of Distribution 

Webb, as at §98. Clark, 'Possibility of a Sci. Law of Wages,' Am. Ec. Asp'n Papers, 
vol. iv. Patten, ' Stability of Prices' [ibid., vol. iii]. Mangoldi, §§128 sqq. 

These are two, (i) the static and (ii) the dynamic. 
i Supposing, at any given time, a community where 
perfect knowledge and competition existed, with no 
artificial hindrances to the play of economic causes 



THE NATURE OF DISTRIBUTION 163 

in distribution, we should, partly a priori, partly from 
experience, expect the proceeds of its industry to be 
classifiable as follows. Wages proper would be the 
return to the simplest form of labor,^ absolutely un- 
helped, or, if applied with aids, the reward of the pro- 
portion not owing to these. All surplus gotten by labor 
in virtue of location, native fertility or other not indi- 
vidually created advantages connected with land, would 
be Rent, which would also cover the proceeds of all 
fixed material monopolies. Excess proceeding from 
the use of native skill superior to that of the simplest 
labor, would be Profits. Whatever increase was due 
to the employment of capital, material or immaterial, 
would be Interest. Gains not referrible to any of the 
above sources, present to some extent in the best con- 
ceivable social organization, would form a Fifth Cate- 
gory, ii If, now, introducing the dynamic element, we 
consider the productive process as in movement, the 
. various factors ^ in production will tend to be remunera- 
tive in proportion to the slowness of their increase, 
competition enabling the hindmost, especially by reap- 
ing the benefit of improvements, to enlarge its share 
at the expense of the others.^ , 

1 This is doubtless a somewhat indefinite conception. All labor, as we 
have seen [§ 25], involves an intellectual element. The labor here meant 
is that into which enter no training and no special native gifts. 

2 Land resources, capital, supervising and planning ability, and simple 
labor. 

3 Patten, as above [sec. iv, esp. p. 37], well develops the second law. 
It operates through competition. Overlooking the effects of diminishing 
returns [§ 34], suppose capital to be doubling in 30 years, the labor force 
[§§ 35> 36] in 20. Wages will fall, till population increases less rapidly 
than capital, that which is lost to wages, along with all gains from im- 
provements, going to capitalists through rise in the rate of interest. So, 



164 THE NATURE OF DISTRIBUTION 

if land facilities are multiplying slower than either labor or capital, land 
rent will be swollen at the expense of both, most, however, to the loss of 
the one getting on the faster. Cf. carefully the following Chapters : also 
Patten. 

§ 102 The Fifth Category 

Wagner, Lehrbuch, vol. i, §§ 300 sqq. George, Prog, and Poverty, bk. iii, ch. iv. 
Walker, P. E., pt. iv, ch. vi. Hertzka, Gesetze d. soc. Eniwickelung. 

Rent, interest, wages and profits by no means ex- 
haust the product of industry. Non-producers may- 
share therein, or producers get an undue share, in 
almost innumeraMe ways, chief among which are the 
following : i Gifts other than charitable, as to one's 
family or friends, ii Charity in its endless variety of 
forms, iii G-anibling,i in which stock and exchange 
gambling must be included, iv Fraud, theft, and rob- 
bery, of all sorts, v Casual nionopoly,^ whether nat- 
ural, accidental or based on legislation or on immensity 
of financial power, vi Unfair legislation or adminis- 
tration in other things, vii Changes in the value of 
money.^ 

1 See § 21, n. 7. 

2 See §§ 66, 67. A good illustration is the fortune amassed in London 
one day in June, 1815, by Baron Rothschild and Moses Montefiore, as sole 
possessors of the secret that Napoleon had left Elba and landed in France 
[§ 95, n. 5]. They bought, low, credits which appreciated immensely soon 
as the tidings became known. Permanent monopoly gains from any sort 
of material possession we reckon as rent [§ 103]. 

» See § 87. 



CHAPTER II 

RENT 

§ 103 Rent in General 

Mangoldt, §§ 120 sqq. Schaeffle, Pol. Oek., § 300; Theo. d. attsschl. Absaizverkdlt- 
nisse, iii-vii. Wagner, Lehrbuch, vol. i, § 301. George, Prog, and Poverty, bk. 
iii, ch. ii. ClierbuUez, bk. iii, ch. vi. 

Rent, in the broadest sense, is any kind of gain 
arising from monopoly, whether in land, capital,^ or 
talent — income which falls to the possessor of any 
productive agency simply because of its rarity. Rent 
forms no part of the cost of production,^ and is pay- 
ment for no service. It swells individual fortunes only 
at the expense of society as a whole. To the total 
revenue of the world, or of a nation or an industrial 
group not exchanging with any other, it therefore adds 
nothing, nor does it subtract, except as dissuading from 
industry. On the other hand, rent does not cause high 
prices, but is caused by them.^ It is usual and well 
to restrict the term ' rent ' to winnings from somewhat 
permanent monopolies, though the idea does not neces- 
sarily presuppose such limitation. 

1 Such cases as are mentioned at § 65, notes 4 and 5, are really cases 
of rent [on capital]. For land rent, or ground rent, see § 104. Profits 
and special wages [see Chapters III and IV] also involve the rent prin- 
ciple. English writers have usually confined the term to ground rent 
[§ 104]. Our use of the word, which seems to us to have very much in its 
favor, is that of Mangoldt and Schaeffle. 

2 See § 105. 



I 66 RENT 



§ 104 Ground Rent 

Ricardo, Prin. of P. E. and Taxation, chaps, ii, xxiv. Mill, bk. ii, ch. xvi. Roscker, 
bk. iv, ch. ii. Maine, Village Communities, vi. Walker, Land and its Rent; P. E. 
[either ed.], 'Rent.' Cf. Int'l Rev., vol. xii. Rossi, in Cours d'Econ. pot. H. 
George, Progress and Poverty. Cairnes, Log. Meth., 29, n., 50 sqq. Wachenhu- 
sen, Untersuchtmgen ueber Grundrente. Hertzka, Sociale Eniwickelung, ch. 
vii. Patten, Premises of P. E., i. 

Ground rent is the advantage accruing ^ to land- 
owners from the use of certain uncreated or socially- 
created ^ powers and utilities connected with land, 
including, besides mere fertility of soil, also mineral 
wealth, water-privileges, location, etc. Return from 
the occupation of land, as the most common form of 
ground rent, furnishes the most obvious and useful 
matter wherewith to illustrate the doctrine. 

1 The definition must be thus wide because the essence of rent is present 
whether land is owned privately or by the community. Of the spots which 
at any time have to be occupied, some are better than others. Both socialism 
and the mere policy of nationalizing the land would try to distribute this 
advantage, but nothing could abolish it. For varying and loose uses of the 
word rent, note 3, below, and § 106. Cf. Mill, bk. ii, chaps, viii-x. 

2 Capital inwrought into land will bear rent if the land does. This is 
strictly not ground rent, though inseparable therefrom. It differs from the 
normal return on such capital, which is interest [§ 106, iv, and n. i]. Cf. 
§ 19, i, n. 2. Let a considerable number of human beings settle in a new 
country: special value instantly attaches to particular localities, and this 
with no act of creation save the act of the people in coming there. But 
much land value is socially created. The Dutch purchased all Manhattan 
Island for 60 guilders, about $2\. On the main street fronts in N.Y. City 
that sum would to-day not purchase a single foot. Store sites on Fifth 
Ave. cost in 1886 ^65 per sq. ft.; ^85 have been paid on Broad St., and 
^100 and ^115 on Broadway. Shares of a land company at Birmingham, 
Ala., costing ^1,100, recently paid a yearly dividend of ^24,000. In Lon- 
don land has often sold for ^240 per foot, and select spots, it is said, for 
as much as it would cost to pave them with English sovereigns laid upon 
edge. Such dearness, springing though it does from a sort of human 
agency, is not the product of conscious doing on the part of any one per- 



RENT 167 

son. In bringing it into being, A, B, and C were instruments, not agents. 
See 'Ground-rents in Philad.,' Quar. Jour. Econ., Ap. 1888. 

§ 105 Rent and Price 

Mill, bk. ii, ch. xvi, sec. 3 sqq. Ricardo, Principles, ch. xxiv. Walker, P. E., § 243. 

Since, as a rule, all land will be cultivated just so fast 
and far as it pays the cost of cultivation, the rent of 
land always tends to represent the surplus of gain arising 
from cultivating better land over the gain of cultivat- 
ing the poorest that is cultivated at all,^ 'better' and 
' poorest ' here referring to location as well as to quality. 
It follows that so long as unused land is still accessible ^ 
and freely resorted to, rent can never become factor in 
the price of agricultural produce, for this price, as 
always where the law of diminishing return has begun 
to work, is fixed by the dearest cost of production, 
which falls precisely upon the no-rent tracts. Capital 
rents, in like manner, never enter into the prices of 
products. 

1 Compare with this, § 34. The margin of cultivation tends to move 
outward with the increase of population, land to-day bearing rent which 
did not do so years ago, etc. But new fertilizers, and new agricultural 
machinery and methods may hinder this. A particular new need for food 
might be thus entirely satisfied without extending cultivation at all. We 
may therefore speak of an ' intensive margin of cultivation,' as well as an 
extensive. Variety of appetites is a further element of irregularity in the 
taking up of land. Soil ill fitted for one crop may grow another; poor 
aralile may be good pasture, etc. [Patten, as at § 104; also in Stability 
of Prices, Am. Ec. Ass'n Papers, vol. iii.] 

2 Suppose no more land to be obtainable. At once begins a com- 
petition, which did not exist before, for the poorest lands, which, under 
private ownership, owners will promptly utilize by charging rent. To pay 
this, the produce from these tracts too must be sold higher. Under these 
circumstances, therefore, rent will appear in price. The statement in the 



I 68 RENT 

first part of this §, as to the measure of rent, will, however, still hold true. 
That, normally, rent does not appear in price, Hume saw, though Ad. 
Smith did not [cf. Bagehot, Ec. Studies, iii] . 

§ 1 06 Peculiar and Nominal Rents 

Walker, P. E., pt. iv, ch. ii. 

Rents of mines, water-privileges, building-lots, etc., 
are determined by the same general law with, agricul- 
tural rents. Yet notice here that : i The location of 
a lot, not its fertility, usually settles its rent, though, 
ii Lowest town-rents coincide with the value of the 
lots for tillage, iii The so-called rent of buildings 
themselves is usually not rent proper but interest of 
capital, iv The normal return for improvements ^ on 
land is also not rent, though often practically insepara- 
ble from it.2 V With increase of the ground rent on a 
spot of land, capital rent often attaches to the build- 
ings situated thereon, as well as to the improvements 
incorporated therein, vi The tendency of long work- 
ing is, in mines toward, in lands away from, the no- 
rent condition.^ 

1 Hedges, ditches, grading, roadways, artificial fertility, etc. Cf. § 104, 
n. 2. 

2 This fact seems to a considerable extent the occasion of the erroneous 
view referred to in § 107. 

3 Mines often become so deep that it no longer pays to use them. Any 
given piece of land, on the other hand, despite the law of diminishing 
return [§ 34], is likely, with the growth of population, to bear higher and 
higher rent. There is no necessity that a piece of land should be worn 
out by cultivation, though extended through centuries. 



RENT 169 



§ 107 Controversy 

Mill, as at § 104. Schaeffle, Bau und Leben des socialen Korpers, vol. iii, 433 [also 
as at §103]. Wirth,\\\ Vierteljahrsch. fur Vclksivirisch., 1863, vol. ii. H. C. 
Carey, Prin. of P. E. Yves Gityoi, Sci. Econ., bk. v, ch. i. Patten, Premises of 
P. E., i. 

'This is the theory of rent first propounded at the 
end of the last century ^ by Dr. Anderson, and which, 
neglected at the time, was almost simultaneously redis- 
covered twenty years later, by Sir Edward West, Mr. 
Malthus, and Mr. Kicardo.'^ Most of the leading 
economists^ still approve it. First challenged by Hoff- 
man,* in 183 1, it has since been earnestly opposed by 
three eminent writers, Carey, Bastiat, and Max Wirth, 
who reduce rent to interest and maintain that no mere 
power of nature can be made to yield a price. Their 
appeal to facts is unsuccessful: differences of rent do 
not at all coincide with differences in the amounts of 
capital applied to different lands. Nor is their doc- 
trine a whit better than Ricardo's as weapon against 
socialism.^ 

1 The pamphlet really appeared in 1777. 

2 Mill, as above. He adds: "It is one of the cardinal doctrines of 
P. E., and, until it was understood, no consistent explanation could be given 
of many of the more complicated industrial phenomena." 

2 Besides Walker, we mention Wagner, Schaeffle, de Laveleye, Roscher, 
and Mangoldt. Mill and Hermann argued for it stoutly. Schaeffle de- 
clares that its critics have not shaken it " in the slightest." Patten's criti- 
cisms do not touch the substance of the doctrine, and are not always just 
even to the Ricardian exposition. 

* Chief of the Prussian statistical bureau, in an address delivered in 
1831. Next came Carey, in 1837, probably ignorant of Hoffinan's con- 
tention. Bastiat wrote in 1848, merely repeating Carey \_Harmo7ties Aeon., 
xiii]. Carey's view is discussed by Wirth, as above, and by Mill, bk. ii, 
ch. xvi, § 5. It boots nothing to allege with Carey that improvements on 



I/O RENT 

land [in U.S., e.g.'] have cost more than the land would bring. Many 
of them have been foolishly made, and, what is more to the point, for par- 
ticular lots and localities, i/ie stateinent is not true. Equally vain is Hoff- 
man's plea that land value always originates in labor [see above, § 104, 
n. 2]. Specially weak is it, with Yves Guyot, to think Ricardo all wrong 
because of his error in assuming that the richest land is always occupied 
first. But if these writers mean (which can hardly be the case) only that 
the product which mankind as a whole gets from the land is measured and 
determined by its toil, are they correct [§ 103] ? The same is true of a 
nation having no foreign commerce, also of one which has, unless it pos- 
sesses net advantage over those with which it trades [§ 68 and n.] . But 
this is no contradiction to the fact of rent. 

^ Wirth urges that the Ricardian theory makes rent-taking unjust, a 
winning which is not an earning, while his own view considers rent nothing 
but a form of interest. But in fact the title of the great British landlords 
[in question] to their income is ethically no clearer on the one assumption 
than on the other. It was the fact of rent [as privately monopolized] that 
led Proudhon to his famous thesis, " property is robbery " {la propriete, 
c^est le vol]. 



CHAPTER III 

INTEREST 

§ io8 The Nature of Interest 

Webb, as at § loo. H. George, Prog, and Poverty, bk. iii, ch. iii. Clark, ' Capital and 
its Earnings," Am. Ec. Ass'n Papers, vol. iii. Bohm-Batuerk, Kapital u. Kapital- 
zins, bk. iii. Knies, Der Credit, viii. Sidgwick, bk. ii, ch. vi. 

Economic interest is that portion of the proceeds of 
industry which arises in consequence of the employ- 
ment of capital : in other words, the wealth which, by 
the aid of capital, men with given native skill, given 
energy and felicity of situation, create over and above 
what they could create using those same helps but 
without capital. Interest varies according to the un- 
like advantages supplied to labor by the different forms, 
locations, and applications of capital, some pieces of 
capital assisting labor little, perhaps, temporarily, not at 
all, while others are absolutely indispensable. Econo- 
mic interest differs more or less from loan interest,^ 
whether (i) at the current rate for short loans or for 
long,2 or (ii) at the normal rate,^ to which variations in 
current rates tend, in any community, to conform for 
considerable periods of time. 

1 It will be seen that the essential fact of interest does not presuppose 
a loan, interest upon loans being a subsidiary and incidental phenomenon, 
growing out of the division of labor and the diversities of human ability 
and circumstance. Intellectual capital of course cannot be loaned, though 
its services may be hired [§ 113]. 

2 Rates, i.e., always being, if other things are equal, the higher the 



172 INTEREST 

shorter the term — higher at banks of discount, discounting only for days, 
weeks and months, than at savings banks, which loan for years. 

^ ' Rate ' is not a happy form in which to conceive economic interest. 
* Portion of product ' is better. Yet to think of it as a percentage need 
not mislead if we bear in mind that its ' rate ' may vary widely from the 
rate of loans, and is in fact a very different thing. 

§ 109 Loan Interest 

H. George, as at § 108. Atkinson, 'What makes the Rate of Int.?', Intl. Rev., vol. xi. 
Bdhm-Bawerk, vol. i. Knies, Credit, vii. 

Nearly all theories of interest err in narrowing the 
problem to loan interest instead of viewing this as 
incidental to the larger one of interest in general. But 
of loan interest itself most accounts are very defective. 
i One set of writers mistakenly call interest roblbery,i 
ignoring its natural source in capital and production. 
ii Others fail in merely referring it to the productivity 
of capital,^ overlooking the elements of abstinence, 
time, and risk, iii Certain authors seem to conceive 
abstinence not only correctly as indispensable to in- 
terest, but incorrectly, as its efficient cause.^ To the 
elements of truth contained in these three views needs 
to be added the one first put in its true light by Bohm- 
Bawerk,* that ' a loan is in fact an excbang-e of present 
against future goods,' so that, as 'present commodities 
normally command a premium over future ones of like 
kind and quantity, a definite sum of present wealth is 
to be had only at the price of a greater in futures.' 
This premium is the pure loan interest. Gross loan 
interest contains the further element of insurance 
against risk. 

1 Marx, and, in part, Rodbertus. See Marx, Capital, vol. i, pt. iii. 
Bohm-Bawerk criticises the view in his vol. i, ch. xi. 



INTEREST 173 

2 Closely allied with this theory are 3 variants : i) the notion of James 
Mill and M'CuUoch, that interest is nothing but the wages of the labor 
stored up in capital; ii) the 'fructification' theory, advanced by Turgot 
and in a modified form favored by H. George, that capital at large draws 
interest because some of it, as land [Turgot], animals, bees, wine [George], 
is actually or in effect live capital, bringing forth value without concur- 
rent labor; and iii) the 'usufruct' theory, of J. B. Say, Hermann, and 
Menger, which derives interest from a supposed peculiarly profitable em- 
ployment of it, yielding gain over and above its natural productivity. 
Bohm-Bawerk [vol. i] keenly and at length reviews all these. 

^ Senior and Bastiat are referred to, but one cannot agree with Bohm- 
Bawerk in supposing them to have meant all that many of their utterances 
would imply. Rees, in From Poverty to Plenty, also wrongly considers the 
truth of the abstinence theory to involve the falsehood of all productivity 
theories. 

* Vol. i, 308; vol. ii, sec. iv. We must emphasize the truth that 'cap- 
ital,' not ' money,' is the true correlative of interest. Contrary to Bilgram's 
thought [Iron Law of Wages], money is rarely, if ever, really the form of 
capital for the use of which interest is paid. Money usually only aids 
to mediate the transfer of capital to the borrower's hands. It may (i) be 
the full and sole agent of this transfer, or (ii), the more frequent case, 
only give denomination to credit-instruments serving the same purpose. 

§ 1 10 The Rate on Loans 

Walker, P. E., pt. iv, ch. iii. Mangoldt, §§ 102 sqq. Sidgwick, bk. ii, ch. vi. 

The rate of loan interest is determined by the ordi- 
nary law of supply and demand, except in this, that 
inasmuch as desire and reluctance to borrow and to 
lend are influenced by every circumstance that affects 
business,^ supply and demand of loans, and hence the 
rate of interest, vary and fluctuate more than other 
prices do. The chief modifiers are (i) the state of 
business, (ii) the abundance ^ or scarcity of capital, 
(iii) the risk^ or security of loans, and (iv) the strength 
or weakness of men's motives to accumulation. Rate 
of interest and amount of saving- are not, however, in 



174 INTEREST 

exact correlation.* Owing to the strong conservatism 

of certain money-lending classes, the actual market 
minimum, as in case of consols, government bonds, and 
bottom mortgages, is lower than either the gross or the 
pure loan interest of capital.^ 

1 The slightest panic or insecurity, caused, e.g., by the rumor of a war, 
though not affecting in the least men's wish to sell meat, bread, corn, or 
iron, will make many unwilling to sell the services of capital. Every finan- 
cial crisis reveals how coy capital is at such times, and also how stupid, care- 
less, and bold it is at others. 

2 It is the growth of capital which causes the rate of interest continually 
to fall in all prosperous industrial lands. Till i868 I2 per cent, or, better, 
I per cent a month, was the lowest rate of interest paid in San Francisco. 
In many districts on the Pacific slope, i.]- and 2 per cent per month were 
not considered excessive, and throughout the Mississippi valley, except in 
a few of the great business centres, the rates of interest did not run much 
below these figures. At present, on the average, interest west of the 
Alleghany mountains costs about one-half what it cost in i868. The 
security is probably no better nov/ than then. The likelihood of an ad- 
vance in the value of the security upon a mortgage loan was even better 
then than now. The change has come simply because, in proportion to 
the demand, there is now a much larger amount of available capital. In 
London, while the official rates of discount have, in the last fifty years, 
sometimes averaged in twelve months considerably over 6 per cent, for 
fifteen years past the yearly average has been but once over 4 per cent. 
During 1888 a large part of the British debt was refunded at 2| and 2.\ 
per cent. Early in the 20th century the normal rate on loans in the richer 
countries vidll very likely not be over 2 per cent, the lowest point to which 
Bank of England discounts have ever yet gone. On the rate of int. in 
Germany since 181 5, Zeitsch. f. Volkswirtsch, XXII, iii, 233. It is evident 
that high interest may or may not betoken financial prosperity, according 
to cause. Rise of the rate in consequence of increase in production is a 
favorable symptom; if resulting from greater risk, the opposite. Con- 
versely, reduction of the rate may be a bad sign, of stagnation in business, 
or a good, indicating lessened risk. Save in panic, abundance of capital 
usually works low interest; paucity, high. 

^ A very influential condition. The low rate at which Gt. Britain and 
the U. S. can market bonds, while in part due to plentifulness of capital, 



INTEREST 175 

is largely owing also to the perfect credit of these governments. The 
Athenians at one time allowed 60 per cent upon marine interest, while 
on land the rate was but 12. 

* The rate will go down in proportion as accumulation increases, but 
accumulation will not go down in proportion as the rate falls. Many 
would save were there no [loan] interest at all. Among the poor, in par- 
ticular, the precise rate has but the slightest effect upon economy. 

^ " Any large lender, placing his risks judiciously, and spreading them 
somewhat widely, is mathematically certain to realize a larger return from 
his capital through a term of years, after deducting losses, than if he had 
invested in the most approved securities" [Walker]. The long time of 
these investments is part cause of this : also the peculiar ease of collection. 
We may say that in return for these advantages lenders give back to bor- 
rowers a part of the real loan interest. Elimination of the risk element 
through multitude of loans is the principle of the English Investment 
Trusts. What is lost in one investment is made up in another. 



§ III Inflation and Interest 

Rate of interest bears no necessary relation to the 

quantity or the value per unit of the money in circu- 
lation. Hence an increase of currency does not, in 
and of itself, affect the rate of interest.^ It diminishes 
the power of a dollar to buy commodities, but not to 
hire its old multiple in money of the same kind with 
itself. Since, however, an expansion or contraction 
of paper currency is always an expansion or contraction 
of credit, the effects of the two are easily confounded. 
But the effect of paper issues on interest is not from 
their character as an enlargement of the currency, 
but from their character as loans.^ 

1 Unless indirectly, by quickening business [§ iio (i)]. 

2 In a state of tense credit the rate rules high because you are not 
absolutely safe in loaning to any one, the monetary unit being so likely to 
fluctuate in value while the indebtedness is outstanding. Thus during the 
civil war all stocks rose and fell with the premium on gold. 



I ']6 INTEREST 



§ 112 Usury Laws 

Knies, Der Credit, vii. BShnt-Bawerk, Kapztal, etc., vol. i, i-iii. Perry, ch. x. 
Bentham., On Usury. Gamier, Traite, 722 sqq. 

The rate of interest determining itself naturally, 
usury laws, as distinct from legal rates ^ for the settle- 
ment of old debts when no rates were agreed upon, are 
pernicious. Aiming especially to protect the borrower, 
which is unjust, they in fact burden him instead, rais- 
ing the rate by narrowing supply^ and by compelling 
borrowers to resort to indirect methods.^ Such legisla- 
tion is relic of a departed social state or of exploded 
economic ideas. The Mosaic code* forbade interest 
because in its time only those in distress sought loans. 
Partly the same fact, partly tradition, led the Churcli 
fathers ^ without exception to retain the Mosaic scruple. 
The G-reeks and Romans were set against interest ^ by 
the further thoughts of all wealth as consisting in gold 
and silver, and of these as 'barren.''^ 

1 These are of course appropriate and necessary. 

2 The legal maximum is sure to be too low. Hence many try to use 
their capital rather than lend. This narrows the loan market immediately. 
It does the same also mediately, by keeping capital in hands not the most 
productive possible. Both effects raise the rate. 

8 One device often resorted to to evade usury legislation is this : A 
wishes to loan, and B to borrow, ^1,000 at 10 per cent for a year — amount 
at the end of the year, ^1,100. B deeds to A a piece of land or a building 
for ^1,000, at the same time signing an agreement to buy it back at the 
end of a year for $1,100. The necessity of all this, and of breaking the 
law, will make such as resort to these means charge and pay high. 

* Leviticus, ch. xxv, Deuteronomy, ch. xv. But the parable of the tal- 
ents, Matthew, ch. xxv, shows that Jesus did not share this prejudice. 

^ See Gibbon, Decline and Fall of the Rom. Empire [ed. Milman], vol. 
V, 314, where reference is made to Barbeyrac, Moral des pires. The 
mediaeval theologians were fond of using against the legitimacy of interest 



INTEREST 177 

the words of Jesus, Luke vi, 35, which read in the Vulgate, mutuunt date 
nihil inde sperantes. 

6 Yet the theoretical opposition did not keep the institution from being 
legalized. The legal rate at Athens when the Roman conquest began was 
18 per cent. Cf. § no, n. 3. The Twelve Tables of Roman law made it 
10 per cent for twelve months, viz., 8J per cent, or an imcia to every as, 
per year of 10 months. The latter was then the fiscal year, though the 
Romans were already beginning to employ the 12 months year along with 
the 10 months or lunar year. At Babylon, in the 6th century B.C., interest 
ranged from 13 to 20 per cent, paid monthly. Here only the lunar year 
was used. 

' Shakespeare, too, calls interest " the posterity of a sterile metal." 



CHAPTER IV 

WAGES 

§ 113 Definition 

Walker, Wages [cf. his P. E., pt. iv, ch. v]. Szdgwick, bk. ii, ch. viiir also in Fort- 
nightly Rev., Sept. i, 1879. Clark, ' Possib. of a Sci. Law of Wages,' Am. Ec. Ass'n 
Papers, vol. iv. Wood, 'Theo. of Wages,' ibid.; also in Quar. Jour. Econ., vol. iii, 
60 sqq. Webb, as at § 100. Mangoldt, §§ 109 sqq. Thornton, in XlXth Cent., 
Aug., 1879. 

'Wages' means here (i) pure wages as distinguished 
from gross, viz., the mere reward for conimon labor, 
excluding all high salaries and fees, and also all forms 
of remuneration under the name of wages so far as 
earned by special talent, education or training,^ (ii) 
real wages, which may in any case vary greatly from 
nominal through differences in the value of money and 
in the regularity, safety, and healthfulness of work, also 
through extras given or allowed to be earned.^ We 
seek, chiefly, the laws of general wages, deferring the 
reasons for the different levels of wages within any 
group of competitors, to the end of the Chapter. 

1 Though we may stop short of Leroy-Beaulieu's avowal that " the whole 
theory of wages must be rebuilt," little, certainly of the older teaching on 
the subject can be accepted without sifting. New definitions are especially 
needed. Rewards earned by peculiar talent are profits [see next Chapter] ; 
those bestowed in consequence of education and training are interest on 
intellectual capital [§ 98. Cf. Crehore, Quar. Jour. Econ., vol. ii, 361]. 
That the several elements all go by the name of wages is unfortunate, yet 
no nomenclature could avert the necessity for care in the mental analysis 
of the case, as the elements of gross wages are themselves to a great extent 
inseparable in fact. But gross and nominal wages do not usually so vary 



WAGES 179 

from pure and real as to render reasonings about the one kind wholly 
misleading in respect to the other. 

2 Walker, P. E., 260 sq. A common instance is the custom in stores, 
of letting the clerks have goods at wholesale prices. 



§ 114 Cause and Source 

Walker, as at § 113 [his ' Wages ' is devoted to the demonstration of the view we present 
on this point]. H. George, Prog, and Poverty, bk. iii, ch. vi. Fawcett, Manual, 
bk. ii, ch. iv. Cairnes, Leading Principles, pt. ii, ch. i. Sumner, in Princeton 
Rev., Nov., 1887 [also in his Essays, in Pol. and Soc. Sci.]. Beauregard, Theo. 
etu Salaire. Levasseur, do., Jour, des Econ., Jan., 1888. McDonnell, Hist, and 
Criticism of Theories of Wages [prize essay, Dublin, 1887]. Marx, Capital. Mar- 
shall, Econ. of Industry, bk. ii, chaps, vi, vii, viii, xi [cf. Quar. Jour. Econ., vol. ii, 
218 sqq.]. Roscher, bk. iii, ch. iii. Jevons, Theo. of P. E., ist ed., 256 sqq.; 2d 
ed., 289 sqq. Thornton, Labour. 

The efficient cause ^ of wages is the labor from which 
they spring, a truth clearly apparent from a glance at 
primitive industry, and in no wise altered by the com- 
plex conditions which arise later. Equally manifest is 
it that the source ^ of wages is the product created by 
the same labor. This theory, now well-nigh universally 
accepted, opposes that of Fawcett and Cairnes, which 
speaks of a fast and rigid * wage-fund/ ^ existing at any 
given moment, made up of capital already produced, 
from which fund wages for the next ensuing period 
must be paid, so that, until there has been, through 
new production, a new accession to capital and the 
wage-fund, wages must depend absolutely and only upon 
the greater or less competition among the laborers, 
arising from their numbers. 

^ Bearing in mind the definitions of §§ 98 and 113. 

2 On this, H. George, as above, is best. Cf. Rae, Contemp. Socialism, 
332. Cairnes, too, forgetting himself, well says, Leading Prin., 58, that 
" industrial rev.'ards consist for each producer, or, more properly, for each 
group of producers, employed on a given work, in the value of the com- 
modities which result from their exertions." " Freight the mother of 



l80 WAGES 

wages " [_i.e., no freight, no wages for sailors] is an old maxim of admiralty 
law [Prog, and Pov., 50], 

3 See Laughlin, ed. of Mill, 178 sqq., Cairnes, as above [the ablest 
presentation of the old view], Walker, " Wage-fund," in Lalor, vol. iii. 
Mill, bk. ii, chaps, xi-xiii, Fortnightly, May, 1869 [where Mill repudiates 
the old doctrine, taught in his Principles]. Mill was led to this by Longe's 
pamphlet, 1866, A Refutation of the Wage-fund Theo. of Modern P. E. 
Cliffe Leslie wrote, agreeing with Longe, in Fraser's Mag., July, 1868. 
Endless has been the discussion since, not all of it sober. If the wage- 
periods be considered very brief, and the reckoning carried over con- 
siderable time, the two theories would not differ in practical effect, since 
by both product would avail for the sustenance of labor at once after it 
was amassed. The wage-fund belief has wrought mischief in disseminating 
the false impressions that contract wages are the only wages, and that wage- 
earners are totally dependent on capitalists. But the new and better doc- 
trine, while correcting these errors, leads many to the equally great mistake 
of supposing the portion of the proceeds of industry which can issue in 
wages to be naturally unlimited, so that, if wages are low, capitalists or 
the state must be to blame [cf. 119]. Further, (i) so far as wages are 
advanced, which is not common, they must be taken from capital, not 
from product, (ii) the amount of wages promised in any given bargain is 
according to prospect of production, and (iii) the total of wages realized 
on the whole and in the long run is as the amount of production. 



§ 115 Developed Wages 

Ad. Smith, bk. i, ch. vi; bk. ii, ch. i. H. George, as at § 114. Clark, Pol. Sci. Quar., 
vol. ii, 605. Sax, Theoretische Staatswirisch., 230, n., §§ 39, 40. 

As industry advances it leans more and more on 
capital, which not all possess. Moreover, not only are 
the precise shares due to each man often no longer 
discoverable, but the product is usually not divisible ^ 
so early or often as the needs of workmen require. 
Those lacking capital therefore covenant with capitalists 
to sell them their wages, in the proper sense, for certain 
supplies to be paid at convenient intervals, so origi- 
nating the wage system as now familiar. The wages 



WAGES l8l 

proper we may term 'noumenal^ wages,* as distin- 
guished from the 'visible wages* actually received. 
Observe that modern wages are as natural in their time 
as primitive wages were earlier. 

1 In a cotton factory, for instance, each weaver's true wage for a given 
day's work is at the end of that day stored up in the web of cloth woven 
during the day. To save breaking bulk, the owner of the establishment 
buys the weaver's true wage, giving him money down. With many writers 
this transaction seems to be the beginning and the end of the wages- 
phenomenon. But wages take other forms than that of contract wages. 
Work in mills is not the sole kind of industry. 

2 The word is borrowed from Kant's philosophy, and means that which 
is real to thought though not to our senses. 

§ ii6 The General Rate of Gross Wages 

Ricardo, Prin. of P. E. and Taxation, ch. v. Clark, as at § 113. Webb, as at § 100. 
Ckerbuliez, bk. iii, ch. iii, sec. 2. 

Competition pervades the entire wage-earning world, 
yet not at all equably, but in tracts or groups of high 
pressure, separated by ridges of low.^ Why, in the 
world, a nation, or a group, does the wages class as a 
whole divide the joint social income on such and such 
terms with landlords, capitalists and undertakers ? 
To this most difficult question different writers give 
the following several answers : i That the winnings of 
the laboring population tend to conform to the returns 
secured by such unskilled workmen as employ no-rent 
lands or no-interest capital.^ ii That 'the natural 
price of labor is that price which is necessary to enable 
the laborers one with another to subsist and to per- 
petuate their race without increase or diminution,' 
according to the standard of comfort prevalent among 
them at the given place and time.^ 



1 82 WAGES 

1 Cf. § 66 and notes. 

2 Tend to conform, that is, to bare wages, in the strict sense [§ 113]. 
The view counts all gains, in any cases, beyond those gotten by such 
unassisted labor, as interest or profits [§§ loi, 113, n. i]. 

2 Ricardo, as above. This is what Lassalle named Ricardo's ' iron 
law.' In fact it is neither iron, as the modifications show, nor Ricardo's. 
It originated with Turgot. He said : " In each species of labor it must 
come to this, that wages limit themselves to what is necessary for the sup- 
port and reproduction of the laborer." But he insisted that this natural 
price of labor is in no wise fixed but varies greatly at different times in one 
country and more greatly still in different lands. The principle is that if 
the ignorant poor find themselves at any time unusually prosperous, they 
multiply till competition has destroyed the advantage. Fawcett, Manual, 
234, declares that in the English agricultural districts wages fluctuate 
regularly with the price of wheat. This phenomenon Ricardo generalized 
somewhat too hastily, as if, which he after all denies rather than asserts, 
extra prosperity on the part of the poor absolutely could not be permanent. 
Cf. § 1 1 8. For H. George's interp. of Ricardo on wages, Social Problems, 
201. 

§ 117 The Residual Claimant Theory 

Walker, Wages, pt. ii; P. E., pt. iv, ch. v. Atkinson, The Distribution of Products; 
The Margin of Profit. Chevallier, Les Salaires au XlXieme Siecle. Giffen, 
Progress of the Working Classes. 

iii That the laws of rent, interest, and profits are at 
the same time laws of wages, wages consisting always 
in the total product of industry, minus what the opera- 
tion of these laws apportions to landlord, capitalist and 
undertaker. According to this view, among the three 
divisions of social income which arise through economic 
merit, pure profits and interest constantly decrease, 
while wages increase, the wages class, not landlords, 
undertakers, or capitalists, being the residual claimant.^ 
That this advantage shows so slight effect upon actual 
wage rates, is laid to (i) the increase of laborers in 
numbers, and (ii) the anomalous and partly illicit gains 
concealed in gross profits. 



WAGES 183 

^ We do not accept this view. Even the considerations at the end of 
the § do not bring it into accord with facts. Wages, both per capita and 
as a total [the one does not necessarily involve the other], are indeed 
increasing, as Chevallier and Giffen show, though the advance cannot be 
shown to keep pace with that in the means of production. The cause of the 
increase, however, we believe not to lie in any laws naturally limiting the 
other shares, but in such elevation, new self-respect, and new demands on 
the part of laborers, and such higher regard for them on the part of the 
public, as recent decades have developed [§ 118, and n. i]. In proclaim- 
ing a natural limitation to the shares other than wages, writers are too apt 
to reckon interest by the mere rates of loans, and profits by mere statistics, 
forgetting, meanwhile, both monopoly gains and the steady growth of 
rents. On this, Hertzka, Soc. Entwickelung, bk. i, chaps, xi, xii. 



§ 118 The Truth 

Giddings, ' Natural Rate of Wages,' in Mod. Dist. Process. Gimton, Wealth and 
Progress. Patten, in Am. Ec. Ass'n Papers, vol. iii, 406 sqq. 

We take Kicardo's law, rightly understood and de- 
veloped, as true, special emphasis being laid on the last 
part of it, which is usually ignored. In one direction, 
wages must sustain life, or work ceases. In the other, 
whatever the competition between employers, the figure 
will, up to the point where higher wages would begin 
to discourage undertakings, be fixed by the laborers' 
standard of life, their sense of what they must have. 
If too high wages are demanded, undertakers will quit 
business : if too low are allowed, laborers will die. 
Enforced poverty, or any other cause breaking wage- 
winners' spirit, lowers wages ; all that gives them 
pride, ambition, and courage, elevates wages. ^ Two 
things are to be carefully noted, however, i After all, 
contrary to common opinion, the portion of the pro- 
ceeds of industry which can during any limited period 
issue in wages is, to a great extent, not arbitrary but 



184 WAGES 

fixed,^ and fixed by the amount of capital available for 
supporting labor, ii No automatic action, prompted 
by motives of self-interest, will heal the evil of degrada- 
tion in the laboring population.^ Hence the value (i) of 
a public opinion in sympathy with labor, (ii) of labor 
agitation, if at once well planned, temperate, and reso- 
lute, and (iii) of education wisely to devise, and moral 
character to make possible, united action.* 

1 Nor need this impoverish any one. Employers, to meet the demand, 
are forced to new economies and invention, which may even have the 
effect of increasing the total production. Gunton, as above, has well 
wrought out the idea. Touching the possibility of a sweeping benefit to 
wage-earners in this way he is probably too sanguine, but within con- 
siderably large limits his thought is correct [§ 117, n. l]. 

2 So Walker, Wages, 410. Wages are in some sense fixed, though not 
in the manner supposed by the wage-fund conception [§ 114]. The sup- 
ply of capital influences them, but through its effect upon the productive- 
ness of the labor. Many who here agree with Walker too nearly overlook 
this, H. George does, yet see Prog, and Pov., 62. 

3 See the noble discussion in Walker, Wages, chaps, xvi-xix. See 'also 
W.'s Address, in Am. Ec. Ass'n Papers, vol. iii, 157 sqq. Upon this point 
many earlier writers of repute held notions that experience has proved 
wholly false. Walker quotes some of these. 

* We agree with Patten, as above, that a general advance in the incomes 
of laborers is not the necessary consequence of enlarged social production. 
It presupposes moral elevation, and must be a slow process at best. The 
ready optimism which studies the vast industrial progress of our time, 
assuming it " as an axiom that all the benefits of this progress pass quickly 
into the possession of the laboring masses," seems to us as mistaken as it 
certainly is honorable to the impulses of its subjects. 



§ 119 Concluding Points 

Ad. Smith, bk. i, ch. x. Yves Guyot, Sci. Economique, bk. iii, ch. iv. 

I In spite of their tendency to equality through the 
action of supply and demand, wages within any tract 



WAGES 185 

of competition differ in the different employments, 
according as these are or are not (i) agreeable, (ii) 
always demanding labor, (iii) dependent on high orig- 
inal gifts, (iv) easy to learn, (v) reputable, (vi) respon- 
sible, (vii) trammelled by restrictive laws or customs.^ 
II The amount paid for wages varies greatly, according 
to the nature of the business, in the proportion it bears 
to the value of fixed capital and in the proportion it 
bears to that of circulating. Fixed capital increases 
with the advance of civilization, out of proportion to 
both wages and circulating capital. Ill Popular errors, 
total or partial, are (i) that good trade makes high 
wages, (ii) that high prices have the same effect, and 
(iii) that wages must needs vary with the price of food. 

^ This influence sometimes raises wages above their proper level, some- 
times has the reverse effect. The latter is many times the case with 
women's wages, which are often, though less and less so at present, lower 
than men's for the same amount and quality of work. Stated fees, too, 
tend to go unchanged through long periods, being fixed by custom. 



CHAPTER V 

PROFITS 

§ 120 Terminology 

Clark and Giddings, Modern Distrib. Process. Maiaj'a, UnternehmergewtMn. 
Wirminghaus, Das Unternehnten. Gross, Lehre vom Unternehmergewinn. 
Schroeder, Unternehtnen und Unternehmerge-winn. 

All economic writers now agree in distinguishing 
profits from interest,^ but another question still divides 
them, viz., whether, of the two elements making up 
gross profits, the essence of profits consists in (i) re- 
ward for the exercise of some peculiar natural ability, 
or rather in (ii) risk^ and the accompanying haphazard 
and anomalous gains,^ analogous with those of specula- 
tion. We prefer nomenclature (i), taking pure profits, 
or profits proper, as the remuneration of special origi- 
nal * talent exercised in any industrial direction. Profits 
manifest themselves most obtrusively in connection with 
the management of business, yet form an immense ele- 
ment in the sums nominally paid as salaries, fees, and 
wages. 

^ Ad. Smith, Ricardo, Mill, and Fawcett treat both under the one name 
of ' profits,' hopelessly confusing many important questions. See, for this. 
Mill's 4th Essay on Some Unsettled Problems in P. E. On Graziani's 
theory of profits, see in Jour, des Aeon., Oct., 1887, 

2 Risk cannot, as is so often thought, be the reason of profits. The 
risk of a business by no means falls, as a rule, entirely upon its manager. 
When authors so represent, they must have in mind the legal responsi- 
bility — a very different thing. The latter often protects the laborers, more 
often it does not, according to the manager's resources. 



PROFITS 187 

' Monopoly profits, ' conjundur ' winnings [as the German economists 
express it], mere good luck in business, etc. Cf. Progress and Poverty, 
172 sqq. J. B. Clark cuts the undertaker function into two parts, the 
industrial and the mercantile. The returns for management he likens to 
wages, the rest, gain which arises from selling the product at more than 
its ingredients — ordinary wages, wages of direction, capital, taxes, etc. — 
have cost, he calls pure profits. But, as a rule, it is precisely the inanage- 
meni which enables the gain to be made on sales. This gain, unless in 
case of some monopoly or peculiar feature removing the operation from 
the sphere of profits anyway, is brought about solely by betier management 
than the poorest which still continues. It is reward to management. 
How else can such reward appear? Does not the gain of merchants come 
by managing wisely? 

* Acquired business ability is of course capital, and its remuneration 
interest [§§ 98, loS]. This, in the case of a profit-taker, would form a 
second element in gross profits, along with that suggested under (ii) in 
the text, above. 

§ 121 Undertakers' Profits 

Walker, Wages, ch. xiv; P. E., pt. iv, ch. iv. Cherbuh'ez, bk. iii, ch. iv. Mangoldt, 
§§ 96 sqq. 

The undertaker,! as capitalizer or user of capital, ful- 
filling an entirely different office from that of the mere 
lender of capital, profits, the undertaker's share in the 
product, are governed by a law analogous with rent.^ 
Power to org-anize industry and apply it to capital 
varies with different undertakers, as fertility of land 
with districts. By the law of dearest cost of produc- 
tion, the prices of manufactures, for instance, are fixed 
by the cost of the poorest undertaker-talent which de- 
mand forces into employment. This is no-profit under- 
taking. The returns of all superior undertakers are 
their profits, varying mainly with ability, partly with 
opportunity.^ 

1 On the use and meaning of this term, § 46, n. i. In the economic 
writings of Franklin and Alexander Hamilton it frequently occurs in just 



1 88 PROFITS 

this sense. An early minute of the trustees of Brown University authorizes 
the faculty to negotiate with some ' undertaker ' for gowns to be worn by 
speakers at commencement. The real undertaker is often a composite 
body [§§ 46, iv; 99, n. 3]. 

2 But beware of following the analogy too far. There is a scarcity of 
land relatively to need, and there is a scarcity of undertaker-ability rela- 
tively to need. But while competition for pieces of land can never so 
increase the productiveness of the best as to throw the poorer out of use, 
but rather poorer and poorer have to be occupied with the lapse of gen- 
erations, competition cultivates undertaker-talent to an ever more and 
more perfect condition, so that poorer undertakers are thrust from the 
field. Degrees of fertility in the land used go on multiplying : degrees of 
talent in management go on decreasing. [Cf. Clark, Pol. Sci. Quar., vol. 
ii, 610.] 

3 Of course, so far as the fortunate opportunity is thing of chance, of 
fraud, or of partial legislation, the profit is gross, not pure. Cf. § 117. 
Income of this sort might be rent, or belong in the fifth category [§§ 102, 
103]. Hugo Bilgram finds the essence, of profits to consist simply in the 
unfair advantage afforded by the ownership of money, the moneyless man 
being at ' the margin of opportunity,' etc. [for Bilgram too carries out the 
rent analogy]. But the gainful chance in trade may be created by natural 
ability functioning in purely economic ways, in which case the gain is pure 
profits. The theory of profits here set forth was first sketched by Bagehot, 
and then elaborated by Walker. It is now, in essence, the prevalent one. 
Ingram, Hist, of P. E., however, conceives it to be yet on trial. For good 
remarks on it, Hadley, ist Rep. of Conn. Bureau of Lab. Stat., esp. p. 21. 



§ 122 Undertaker-Talents 

Clark, ' Profits under Modern Conditions '; Pol. Sci. Quar., vol. ii. 

The reasons for certain undertakers' superiority over 
others are many in both number and kind. Force 
of will and strength of mind are naturally the main 
determinants. All turns sometimes upon a cool, phleg- 
matic temperament, sometimes upon courage or cheei*- 
fulness. A gift for administration in general may 
tell the story, or, in particular, the power to manage 



PROFITS 189 

men. So may economy, thrift, attention to business, 
memory, quickness at figures, accuracy, the ability 
to hold in mind many details at once. In not a few 
cases good health ^ or a rugged constitution will be the 
decisive characteristic. 

1 M. de Lesseps is able, it is said, to go days without sleep, and then, 
when opportunity offers, to make up by sleeping all day long, in a railway 
carriage if need be. Let pupils suggest as many other causes of profits as 
they can besides the above. 

§ 123 Profits, Prices, Wages 

The authh. at §§ 117, 118. 

Pure profits, consisting wholly of wealth created by 
the powers of given undertakers over and above what 
would have been produced by the same application of 
labor and capital under less efficient leadership or man- 
agement, neither (i) enter into the prices of products, 
nor (ii) lower or anywise antagonize wages.^ On the 
contrary, wise and energetic undertaking is absolutely 
vital to the increase of wealth. ^ Anger at the great 
captains of industry on account of the pure profits 
which they acquire is not only groundless but insane. 
Rather is it the stupid and unsuccessful undertakers 
who deserve blame, sinking capital, starving laborers. 
The signal importance and unique character of the 
undertaker-function account for the present and proba- 
ble limitation of co-operation. 

1 Gross profits may of course include illegal and immoral gains, to the 
injury of laborers as well as of others. 

2 As well, remarks Bagehot, speak of the compositors as ' making ' the 
London Times as of laborers in the ordinary sense being the sole creators 
of wealth. 



Part V 



CONSUMPTION 
CHAPTER I 

NEED 

§ 124 To Resume 

Mangoldt, bk. v. Chapin's Wayland, ch. x. Gamier, Tratte, ch. xxxiv. Patten, 
'The Consumption of Wealth' [Univ. of Pa. Pubb., P. E. and Pub. Law Ser., No. 4]. 
Lexis, in Schoenberg, vol. i, XII. 

The general nature of consumption was presented 
in §49, where the subject received consideration so far 
as we found it to be a phase of production. Unpro- 
ductive consumption, or consumption as an indepen- 
dent department of Economics, is now to be studied. 
Since man produces to live instead of living to pro- 
duce, unproductive consumption is the ultimate end^ 
of all wealth, and hence of all production. Our 
economic efforts have their entire occasion and their 
essential explanation in the needs ^ of human beings. 
These may be (i) corporeal or mental, (ii) original or 
acquired, (iii) legitimate or illegitimate. 

1 But we do not agree with the authors who regard this fact a sufficient 
reason for treating Consumption before Production. A canvass of man's 



NEED 191 

needs would certainly not be inappropriate in an introduction to Economics, 
but consumption is not confined to a study of needs. 

2 It is a remark of the Italian economist, Fuoco, that man, " however 
great he may be, is nothing but a living need, a sum of needs " \jutto quanta 
h puo chiamarsi tm bisogtio vivente, zuia somma di bisogni'\. 



§ 125 Elasticity of Need 

Mangoldt, 197 sq. Patten, as at § 124. Cf., above, § 62 and the authh. there named. 
Clark, Philos. of Wealth, ch. iii. Lexis [as at § 124], § 4. F. A. Lange, Arbeiter- 
/rage [4th ed.], 164 sqq. 

Consumption increases and decreases with plenty, 
but very un symmetrically. Although each depart- 
ment of the things which we desire is susceptible of 
great expansion, the food requirement has less latitude 
than that for clothing, this less than that for shelter. 
Kinds of food vary in the same respect. Any man's use 
of salt nothing could much extend, but new cheapness 
would greatly multiply veg-etahle dishes, and meats, 
spices, and drinks more still. In dress, each season, 
each change of temperature, and almost every occa- 
sion demands of such as can afford it some modifica- 
tion. Dwelling accommodations vary from wigwam 
to palace, while our demand for immaterial goods has 
a truly infinite range. Liking for variety develops 
most rapidly in food, next in dress, next in the appur- 
tenances of home, last in the intellectual and spiritual 
realm. Retrenchment follows in general an order the 
reverse of the above, but with modifications largely 
determined by pride ^ and hahit. 

^ The limitation of outlay is nearly sure to begin at points where it will 
be least noticed, since people do not love to advertise their poverty. 
Usually, therefore, economy will strike food before lodging, bringing one 



192 NEED 

to dispense with meat, e.g., in favor of vegetables, and so on. This, in fact, 
when such partial luxuries as tea, coffee, and tobacco have not yet been 
given up, since habit powerfully co-operates with pride for the retention of 
these. Retrenchment in clothing comes last, — in the outer garments last 
of all. The possible sweep of retrenchment is greatest in housing, the 
whole of which may be surrendered, next most complete in clothing, a part 
of which, in temperate climates, must be retained, least complete in food 
[§ 62, n. 2, also Mangoldt, as above]. 



§ 126 Fashion and Progress 

Rose her, § 8g, n. i. Paite?t, as at § 124. 

Presupposing considerable resources on the part 
of consumers, the direction assumed by consumption 
varies enormously with class and station in life, cus- 
tom, wMm, and accident.^ As a rule, the poorer a 
family is, the greater the proportion of its total in- 
come which it expends for food.^ Changes in taste 
render millions' worth of goods unmerchantable each 
year. In food the prime delicacies of one season may 
have no sale the next. The office of sugar at present 
was once fulfilled by honey. The middle age used 
enormous stores of wax, the head church of Witten- 
berg requiring, just before the Reformation, 35,000 
pounds a year. In Catholic lands the consumption of 
fish noticeably varies with diligence in the observance 
of fasts. The growth of civilization and culture 
brings with it increasing refinement of needs, atid a 
steady advance from coarser to nicer in the things 
which men consume. 

1 There are three ways in which wealth may cease to be such [cf. § 19], 
viz., change in (i) the objects constituting it, (ii) the subjects possessing it, 
or (iii) the relations between subjects and objects. Consumption in the 



NEED 193 

narrowest sense comes under (i) . We have a case of (ii) whenever change 
in need leads to the casting aside of articles previously valuable, and of 
(iii) when war, revolution, or other cause renders possessions insecure 
[Mangoldt, § 134]. 

- The so-called 'Engel's law.' On this, and the numerous studies besides 
Engel's of the same problem. Lexis [as in § 124], §§21 sqq., and notes — 
very valuable. It may be regarded as a counterpart of this law that a man 
pays for house rent a smaller proportion of his income the larger his income 
is. It has been ascertained that in Breslau, Germany, a family with a 
yearly income of from ^300 to ^1000 pays about ^ of it for dwelling accom- 
modations, one getting from $1000 to ^1500, about ^, one with from ^1500 
to $3000, about |, one with from $3000 to $7500, about j-\, one with a 
higher income than this about i}(j. Probably 90 per cent of the families 
in that city pay |. In the U. S. the proportion is doubtless somewhat smaller 
for the poor and much larger for the rich. 



§ 127 Legitimacy of Need 

Seneca, Epistle xxxix [moderate riches the best: useless wants]. Hutne, Essay, Of Re- 
finement in the Arts. The authh. at § 131. 

Needs are not to be recklessly multiplied, but lim- 
ited to those whose existence and supply are neces- 
sary to our best producing- power and largest life.^ 
Very often, however, the creation of new need will 
bring with it a more than proportional productive 
ability. This may occur directly, as when the ignorant 
and degraded acquire culture and the accompanying 
enlargement of manhood, or indirectly, by the limita- 
tion of population, rendering the laboring class more 
productive in proportion to its total need. There are 
also needs, religious, moral, aesthetic, whose existence 
is a good though they may not enhance productive 
ability at all. 

^ What this is Economics must find out from Ethics. In proportion as 
needs are fictitious and abnormal the gratification of them becomes destruc- 



194 NEED 

tive consumption. Economic law here agrees with ethical. Pre-eminently 
in the department of Consumption does Economics abut upon Ethics 
[§ 131, n. 2]. At many points the question whether an act or a process 
is productive or the reverse is absolutely unanswerable by Economics alone. 
Hume, as above, has good thoughts on the sorts of want-creation which 
ought to be encouraged. 



CHAPTER II 

economy in supply 

§ 128 Generic Principles 

It is possible to use up wealth (i) in placating legriti- 
mate and proper needs,^ (ii) as dead loss, answering no 
requirement at all, (iii) disproportionately to the neces- 
sities satisfied, or (iv) to meet cravings that, as base 
and deleterious, ought to be repressed. Obviously, 
with given resources, society will be prosperous eco- 
nomically in proportion as (i) expenditure is had only 
for legitimate needs, and (ii) all needs, these or other, 
which are ministered to at all, are supplied with the 
smallest outlay adequate to the end. 

1 See § 127. 

§ 129 Specific Principles 

Mangoldt, § 139. ChapMs Wayland, ch. x. 

i In satisfying needs,^ our own or those of other 
people, we should prefer if equally efficient,^ (i) repro- 
ductive ^ to unproductive* consumption, (ii) less unpro- 
ductive to more, and (iii) high and lasting gratifications 
to low and fleeting ones, ii It is important that (i) every 
utility connected with the consumed wealth should be 
entirely consumed, and that (ii) they should all be 
applied in the most advantageous manner, iii In case 
of any proposed doubtful expenditure, we should ask, 
(i) Will it on the whole and in the long run tend to 
production or productiveness ? If not, (ii) will it 



196 ECONOMY IN SUPPLY 

inure to the elevation or to the degradation of charac- 
ter ? If it will elevate, (iii) will the whole good attained 
by the consumption exceed that to be expected if the 
wealth remains unconsumed ? In replying to (iii), re- 
member that the moral effort of foregoing a benefit is 
likely to be itself a benefit. 

1 J. Tucker [Two Sermons, 29 sqq. : cited by Roscher, § 102, n. 2], lays 
it down that a man ought (i) not to spend beyond his income, (ii) to pro- 
vide for himself and family, (iii) to lay by something for a rainy day, 
(iv) to be able to aid the poor, (v) to indulge in no pleasure injurious to 
body or mind, and (vi) to set in his expenditure no bad example. 

2 If the reproductive form is less efficient in the given case, then the 
question must turn upon the character of the proposed unproductive form. 
See iii, in this §, also §§ 127, 131, n. 2. 

3 A new coat to a feast or a concert, for instance. It is true that the 
need addressed would not be the same in the two cases, yet to a person 
with limited resources precisely such an alternative is often presented. 

* A good coat to a fine one of poorer quality, for instance. Cf. n. 2. 

§ 130 Prevention of Loss 

Mangoldt, § 135. Thomson, ' Waste by Fire,' Forum, Sept., 1886. 

While the vices specified at § 50,^ causing waste, 
are responsible for enormous destruction of wealth, it 
is to be observed that much useless consumption is in- 
evitable,^ due to the very nature of things. Of this 
loss the volume can be reduced only by the progres- 
sive mastery of matter by mind, displayed in new 
arts and inventions. Our resources are : i Improved 
means for preserving perishable goods.^ ii Wider 
knowledge, through more general education and in- 
telligence, of such means as at any time exist, iii A 
more durable construction of buildings and other 
objects exposed to the destructive elements, iv Better- 



ECONOMY IN SUPPLY I97 

ments in police,^ veterinary, and sanitary science, 

legislation, and administration, v A firmer grasp and 
wider observance of the laws of life in all its spheres, 
social and moral as well as physical, intensifying 
men's productive power, lengthening their average 
productive period, and diminishing the size of the 
unproductive and dependent class. 

1 See that §, and notes. In point is the incident related by J. B. Say, 
P. E., bk. ii, ch. v. A small latch was gone from a farmyard gate. One' 
day a pig escaped into the woods, " and the whole family, gardener, cook, 
milkmaid, etc., turned out in search. The gardener, in leaping a ditch, got 
a sprain that confined him to his bed for a fortnight. The cook found the 
linen burnt that she had left at the fire to dry. The milkmaid forgot, in 
her haste, to tie up the cattle in the cowhouse, and one of the loose cows 
broke the leg of a colt that was kept in the same shed." Say figures at 20 
crowns the loss of these minutes, all for want of a bit of iron which would 
have cost but a few sous. 

2 Professor Chandler Roberts, says the Engineering and Mining Jour- 
nal, estimates the weight of the smoke cloud which daily hangs over 
London at about fifty tons of solid carbon, and 250 tons of carbon in the 
form of hydrocarbon and carbonic-oxide gases. Calculated from the average 
result of tests made by the smoke abatement committees, the value of coal 
wasted in smoke from domestic grates amounts, upon the annual consump- 
tion of 5,000,000 people, to ^12,287,500. 

^ See § 54, n. 6. 

* It was sheer neglect, nothing else, which caused the fearful Conemaugh 
disaster in and about Johnstown, Pennsylvania, May 31, 1889, when the 
bursting of an ill-made dam caused the loss of perhaps 10,000 lives and 
$10,000,000 worth of property [figures very uncertain]. 

§ 131 Luxury and Idle Wealth 

Roscher, ' Ueher den Luxus'' [in Anstchten, vol i]. Goldwin Smith, ' What is Cul- 
pable Luxury' [in Lectt. and Essays]. Vierieljahrsch. f. Volkswirtsch., XXII, i, 
24 sqq. Periii, Richesse dans les societes chretiennes. Baudrillart, Histoire 
du luxe. Lexis [as at § 124], §§ 11 sqq. 

Consumption beyond the actual requirements of 
life may be termed luxury, 'luxuries,' of course, vary- 



198 ECONOMY IN SUPPLY 

ing in their definition as the standard of living ad- 
vances, and the luxury of one generation becoming a 
necessity of the next. It is clear from the principles 
already laid down that while certain species of con- 
sumption are always reprehensible, the use of luxuries 
is in itself never so. What luxury then is culpable? 
The foregoing paragraphs enable us to reply, i Con- 
sumption for luxuries is to be condemned from the 
point of view of one's own personal life, (i) when 
addressed to no rational necessity, or out of propor- 
tion to such necessity provided it exists, (ii) when 
addressed to less pressing or important needs to the 
neglect of those more so, and (iii) when it transcends 
one's means, ii It is an evil from the social point of 
view, (i) unless it stimulates rather than discourages 
labor, and (ii) unless it elevates instead of degrading 
the characters of men.^ The same principles hold in 
cases where wealth is not immediately consumed, but 
invested in idle forms, as needlessly costly dress, 
houses, equipage, jewelry or plate, works of art to 
feed vanity or to please the taste of a select few, etc. 
In all such expenditures so much capital is lost^ to 
the support of labor, as truly as by fire or hurricane. 

1 Baudrillart, as above, vol. i, § 98. 

2 The view characterized in n. 10, of § 20, is set forth by Bayle, Dic- 
tionary, vol. iv, 520. Arguing on the notion of the Stoics that evil is 
necessary as a foil or fender over against good to make it appear as good, 
he says : " Nevertheless it must be acknowledged that they were in the 
right in some respects, for, to give an instance of it, can anything be rnore 
ziseful than luxury for the maintenance of many families that would starve 
if the great men and ladies spent but little." On this specious but wholly 
untenable theory, study § 50, n. i, and the references there made. Cf. also 
Lexis [as at § 124], § 19, and Mill, bk. i, ch. v. For the Cleopatra who 
drinks pearls, the Heliogabalus who feasts on nightingales' tongues, or the 



ECONOMY IN SUPPLY I99 

modern spendthrift who gives an all-night entertainment costing thousands 
and leaving only " withered flowers, rumpled vanities, deranged stomachs, 
and overtaxed nerves," Economics finds no more justification than for the 
Nero who burns Rome [Brown, Studies in Socialism, xii]. It will be said 
that all these things furnish work. So does a conflagration. An uncle of 
J. B. Say, the French economist, broke his wineglass after dining, remark- 
ing, " the world must live." Say wondered " why he did not break the rest 
of his furniture for the benefit of the world's workmen." That a product 
wears out prematurely, and must be replaced is no industrial benefit, and 
no more is extravagant expenditure. It furnishes immediate employment, 
but it stops there [ibid.] . On needless wealth causing poverty at Rome, 
Blanqui, Hist, of P. E., ch. vii. The consideration raised in the text and 
dwelt upon in this note should be regarded in many cases of unproductive 
consumption which are in themselves wholly legitimate, as building a 
church, sending money to the heathen, investment in fine art though for 
public behoof. Outlays of this kind certainly withdraw capital from the 
support of labor. The man who loves his kind will in proposing an ex- 
penditure of this order raise the [ethical] question whether his capital is 
likely to effect more good on the whole and in the long run laid out as 
proposed, or productively. More imperative still is the query if I meditate 
gratifying a merely personal need, however noble. So far as this life is 
concerned, there may be an absolute conflict between my highest interest 
and that of the laboring class [§ 15, n. 4]. 



Part VI 



PRACTICAL TOPICS INVOLVING ECONOMIC 
THEORY 

CHAPTER I 
coin currency in the united states 

§ 132 Colonial Times 

Sumner, H. of Am. Currency. ' Dollar,' ' Cent,' and ' Coin,' in Am. Encyc. Bryant 
and Gay, Hist, of U. S., vol. iii, 131 sqq. 

The earliest colonial coin is believed to have been 
one struck in 1612, on the Bermudas, for the Virginia 
Company. The first coinage upon the main land issued 
from the 'mint howse' at Boston, under act of the 
Massachusetts general court, 1652. There were twelve 
pence, six pence, and three pence pieces. The plain- 
ness of these exposing them to washing and clipping, 
the *pine tree coinage '^ was the same year ordered 
struck from a new die. This Massachusetts mint stood 
about thirty-four years, and a new one went into opera- 
tion in 1788. Coins for America were made in Eng- 
land, at first for Maryland alone, later for the colonies 
at large. The execrable * Wood's money,' ^ of pinch- 
beck, was among these. From 1778 to 1787, not only 



COIN CURRENCY IN THE UNITED STATES 201 

Congress but several states as well issued copper 
coins,^ Connecticut and Vermont in 1785, New Jersey 
in 1786 and 1787. 

^ This designation, the usual one, does not in strictness apply to the 
whole coinage, as part of the pieces bore the likenesses of other trees. 
The assumption by Mass. of the right to coin was one of the things which 
at this period so incensed Charles II against the colony. 

2 In 1722 George I commissioned one William Wood to coin pinchbeck 
money for the colonies. A pound of the material [3 oz. zinc to 16 of 
copper], which somewhat resembled gold, was coined into 13 shillings. 
Little of the money circulated. 

^ These are now rare. The Jersey copper wore on the obverse the 
inscription Nova CcBserea, a horse's head, and under it a plough ; the reverse, 
a shield and the legend, e pluribus unum. The continental copper of 
1787 had 13 rings on one side, representing the 13 original states. Each 
ring had the initial letter of a state. " Tempus Fugit," sun dial with rays, 
and " Mind Your Business " were the other insignia. On the continental 
copper of 1 793 was a head of Liberty, with full, streaming hair. 



§ 133 Earliest National Coinage 

McMaster, U. S., vol. i, 189 sqq. Bancroft [author's last rev.], vol. vi, 119. Laugh- 
lin. Bimetallism in U. S., pt. i, ch. ii. 

A plan for a national decimal coinage, which Robert 
and Gouverneiir Morris and Jefferson ^ had devised, 
was approved by Congress in 1785-6, its unit a dollar, 
virtually the same as the Spanish, in which the Conti- 
nental Congress kept its accounts.^ Jefferson's dollar 
contained 375tA grains of fine silver. Half-dollars, 
double dimes, dimes, cents and half-cents were to be 
coined in proportion, also gold eagles and half eagles, 
but no value-relation between gold and silver was 
fixed. These gold coins, with the addition of double 
and quarter eagles and three dollar pieces, all reduced 
to somewhat less than the original amount of gold to 



202 COIN CURRENCY IN THE UNITED STATES 

the dollar,^ still remain, mechanically and artistically 
among the best in the world. 

1 According to McMaster, vol. i, 195, the real work was done by Gou- 
verneur Morris. 

2 Because in Pa. and N.J., where the old Congress sat, this had come to 
be the most common money. The Spanish milled dollar, ' pillar ' dollar, or 
'piece of 8' [' Reals,' ' Ryalls,' or ' Royals'], is one of the most interesting 
pieces ever coined. It began to be used in our southern colonies by 1650, 
and gradually worked its way before the Revolution to the extreme north. 
None of our histories have any adequate account of colonial metal money 
or colonial money of account. The colonists at first used not only English 
money denominations but English money itself. By 1650, however, the 
colonial pounds, shillings, and pence had become depreciated in compari- 
son with sterling, so that from this time on the colonial pound was at no 
time or place the equal of the pound sterling. Moreover, the depreciation 
was different in different groups of colonies. If, about 1760, we call the 
pd. sterling loo, the Ga. pd. would equal 90; the N.E. and Va. pd., 75; 
the pd. of the middle colonies [N.J., Pa., Del., and Md.], 60; and the N.Y. 
and N.C. pd., 56|. Corresponding to these various degrees of depreciation, 
the Spanish dollar, which was the equal of 4s. 6d. sterling, passed for 5^-. in 
Ga., for 6s. in N.E. and Va., for ys. 6d. in the middle colonies, and for 8s. 
in N.Y. and N.C. Colonial pds., sh. and pence were nothing but money of 
account, there being uiider these names no corresponding coins. Very vari- 
ous coins, English, German, Dutch, French, Portuguese, and Spanish, circu- 
lated, but far the most common by 1750 was the Spanish dollar with its 
halves, quarters and eighths. It was common and for legal purposes neces- 
sary to name each of these in terms of the shillings, pence, etc., of each 
group of colonies. The eighth part of the dollar [the i Real piece = \2\ 
cents], e.g., happened in N.Y. exactly to equal the shilling. In N.E. it 
was very nearly 9 pence, and was so called. In the middle colonies, where 
the dollar contained 90 pence [7^. 6^.], it M-^as 11 pence and a fraction, 
and was hence called the 'levy.' Correspondingly, the half Real, or 6^ 
cent piece, was known in N.Y. as ' sixpence,' in N.E. as ' fourpence ' or 
' fopence,' and in Pa. and N.J. as the ' fippenny bit ' or ' fip.' When nine- 
pences and levies became much worn they passed for dimes, whence the 
dime came to be sometimes called, in N.E. a ninepence, in Pa. and N.J. a 
levy, names heard in country parts so late as i860. 

^ For the variations in the weight of our gold money, see next §, ii, 
and ' Dollar,' in Am. Encyc. As noted at § 85, n. 4, the U. S. now takes 



COIN CURRENCY IN THE UNITED STATES 203 

no seigniorage for coining gold, tlie change having been introduced by 
the act of Jan. 14, 1875 [sec. 2], for resuming specie payments [Revised 
Stat./§3524]. 

§ 134 The Dollar of the Fathers 

Laughlin, as at preceding §, pts. i, ii. ' Money,' in Am. Encyc. Bolles, as at § 139, 
bk. ii, ch. V. 

i By the mint law of 1792, framed under the sur- 
veillance of Hamilton, the silver dollar was made to 
contain 371.25 grains of fine silver, 416 of standard,^ 
the alloy constituting iVtrr parts of entire weight. The 
amount of pure silver in this dollar has remained un- 
changed ever since, but, in 1837, by the reduction of 
the alloy-fraction to the more convenient one of ^^o^ the 
coin assumed the weight which it now has, 41 2|- grains, 
1^ fine.2 ii The law of 1792 had fixed the value-rela- 
tion between silver and gold at 15:1, which proportion 
of silver being too small,^ gold retired. The gold bill 
of 1834 changed the proportion to 16 :i, over-valuing 
gold in turn and retiring silver, iii In 1853, on account 
of the still further appreciation of silver through the 
discovery of gold in California* and Australia, not only 
had the silver dollar totally passed from circulation, 
but, to retain in the country the suhordinate silver, it 
was necessary to render this a token coinage by extract- 
ing a seigniorage of 6\^ per cent ^ the face-value of each 
coin, token silver being after this legal tender only to 
;^5.oo. The silver dollar, however, remained full legal 
tender till 1873, when, having in relation to gold greatly 
depreciated^ again through large increase in silver pro- 
duction, lessened exportation to Asia, and the assump- 
tion by the German Empire of the gold standard, it was 
silently demonetized^ 



204 COIN CURRENCY IN THE UNITED STATES 

1 Or, as figured by Perry, 330, it was 8924 fine. 

2 Our gold coins have, also since 1837, this same fineness. They are 
intended to contain xofo °f copper, and xioo 01^ l°ss of silver. If less than 
this silver, the lack is made up in copper, such margin being known as the 
' tolerance ' [see Lalor, vol. i, 509]. On fineness of Eng. coins, § 75, n. 10. 
The Canadian coins agree in this respect with the English. 

3 It was at the time exactly correct, but silver was already growing 
cheaper relatively to gold, so that in the London market almost immediately 
over 15 parts of silver were required to equal I of gold. Less and less gold 
of course came to our mints [Gresham's law, § 85, n. 5], some years hardly 
any. After 1 834, precisely the reverse conditions prevailed, the silver which 

-had circulated gradually hiding itself away. A lively business was done at 
buying up the dollars from ignorant holders and selling them as bullion. 

* Cf. von Hoist, Const, and Pol. Hist, of U. S., vol. iii, 405. 

^ Our subordinate silver coins [tokens] were somewhat enriched again 
in 1873. Before that, the weight of 2 halves, 4 quarters, or 10 dimes was 
385.8 grains, or 25 grams, and their value .93 rr that of the full weight 
dollar. Now the value is .93|xvf of full weight, giving a seigniorage of 
about 6/g- per cent. Our present half dol. exactly equals in weight and 
value half of a French silver 5 franc piece. There are now 65 Eng. shil- 
lings in a Troy pound of silver. Eng. silver money consists of tokens, 
legal tender only to the sum of 40 shillings, each piece having a bullion 
value 63^3 per cent less than its face value. 

^ This phenomenon is more truthfully characterized as an appreciation 
of gold. The power of silver to purchase general commodities did not sen- 
sibly, if at all, decrease, but that of gold increased. General prices, i.e. [the 
only sure test, see §§ 70, 87], fell in gold countries, remained stationary in 
silver countries. 

'' The act was popularly but with little doubt erroneously believed at the 
time to have been carried through Congress in guile, that knowing parties 
might realize from the rise of gold. 

§ 135 Remonetization 

Laughlin, Bimetallism in U. S., pt. iii. ' Bullion,' in Encyc. Brit. Grier, The Silver 
Dollar. BoUes, as at § 139, bk. ii, ch. v. 

On the ground that the government bonds issued 
during the war had been made payable in *coin'i and 
that the demonetization of silver, if persisted in, would 



COIN CURRENCY IN THE UNITED STATES 20$ 

work hardship to taxpayers in liquidating the national 
debt, Congress, in 1878,^ restored to the old silver dollar 
its full legal tender quality, ordering, however, instead 
of free coinage, that only a given amount, not under 
two or to exceed four million dollars' worth,^ be coined 
monthly. Although still for many years the value of 
the gold dollar continued to gain over that of the bul- 
lion in the silver,* silver dollars and certificates have 
inflexibly held to the gold par. But the position, all 
admit, is anomalous. 

^ Which of course at the time legally included silver as well as gold. 

2 The act passed, over President Hayes' veto, on Feb. 28. 

^ Not so many dollars, but so many dollars' "worths, very different con- 
ceptions. If the bullion in a silver dollar cost but 75 cents, ^1,000,000 
worth of silver would, ignoring alloy, yield i \ millions of dollars. The orig- 
inal bill provided for free coinage. The limiting clause originated in the 
Senate, with Senator Allison, and was dubbed ' Allison's tip.' 

* May 15, 1888, and on one or two other occasions, the London price 
of silver fell to 421/. an ounce, corresponding to a bullion price for the silver 
dollar of about 71.5 cents. By noting in any report of the London market 
the price of silver bullion there, the bullion value of the silver dollar is 
easily figured according to the following rule. By whatever per cent silver 
in London goes above or below 58.9S008 pence an oz., the bullion in the 
silver dollar is worth more or less than one hundred cents in gold. For 
another rule, see Rep. of Paris Monetary Conf. of 1878, early pp. The 
relation between the prices of pure gold and pure silver, or of gold and 
silver of any given fineness, provided it is the same for each metal, may be 
found by dividing 943 by the no. of pence per ounce which the silver costs. 
This rule is developed as follows : Gt. Britain makes 1869 sovereigns from 
40 pounds Troy, \\ fine (nearly). Hence an ounce Troy of gold W fine 

is worth 2_ — £2,\\% or ^f 3 175. 10^. = 934 W.; and the val. of the 

40 X 12 
oz. Troy ol pure gold is 934 J X xf- -A-n oz. of pure silver at x pence per 

oz. 15 fine w'd be x\^ or j_f. Now to find how many times more valu- 
able a given weight of gold is than a given weight of silver, divide 
934i X \\ by ^~ which = ^-^^^^J^^^" or (nearly) ^. /..., if $ I 



206 COIN CURRENCY IN THE UNITED STATES 

943 
gold weighs 25.8 grains, $ i silver weighs 25.8 X grains. Also, if 

that weight of silver is worth but $ i.oo, 412.5 grains will be worth 

943 
proportionally less. I.e., as 25.8 X is to 100 cents, so 412.5 will be to 

the value of the dollar of the fathers in gold cents. French and German 
discussions usually describe our coins in terms of the Metric System. A 
grain Troy is .0648 of a gram. Hence the gold dollar, of 25.8 grains, 
weighs 1.67184 grams, and the silver dollar, of 412^ grains, 26.73 grams. 
A kilogram of gold contains very nearly ^690, or £139 los. A kilogram 
of silver, at the ratio to gold of 15^^ to i, contains about ^43.80, or £g. 



§ 136 The Future 

Laughlin, ed. of Mill, Appendix [good bibliog. on silver qn.] . Cf. our § 77, above, and 
its authh., esp. U. S. Consular Rep., Dec, 1887. /. W. Sylvester, Bullion Certifi- 
cates: The Safest and Best Money Possible [a pamph., 1884]. Knox, United States 
Notes, ch. X. 

i The gold monometallists would at once and forever 
demonetize silver, ii The more pronounced friends of 
silver cling to the present law,^ willing, apparently, 
that the worst possible should come, allowing silver, 
if need be, the monopoly which gold has enjoyed since 
1873. iii The advocates of rated or proper bimetal- 
lism ^ hope that the United States will assume no 
final attitude against silver as full money till effort for 
a bimetallic league of nations has been exhausted, 
iv A fourth party would realize M. Joseph Garnier's 
theory of unrated or formal bimetallism, further pro- 
posing that gold bullion as well as gold coin be made 
legal tender and the standard of value, silver like- 
wise legal tender but only at its market *^alue in 
gold, calculated and published daily by government. 
With numerous great merits, this plan ^ has in kind the 
defects of gold monometallism. International bimetal- 
lism, of which there is little hope,* would relieve us for 



COIN CURRENCY IN THE UNITED STATES 20/ 

a time, but only for a time. Wise action must look 
toward ideal money .^ 

1 Except that many wish the free coinage of silver. 

2 See § 77. 

* This is the scheme of Sylvester's pamph. named above. It allows to 
the dollar all the fluctuations in value to which gold alone is subject, this 
metal being the only ultimate standard, but it would somewhat limit the 
range or sweep of these, in that a good deal of silver would be in use as 
medium of exchange. 

* See the Consular Report named above, esp. Appendix D, by the 
learned Soetbeer. Comparable with these invaluable " Materials " given 
us by Soetbeer on the Silver Question, is the memorandum by R. H. Inglis 
Palgrave, printed as App. B to the final Report of the [1886] British Com- 
mission on the Depression of Trade and Industry. It is based on Soet- 
beer, but adds much that is valuable. Germany would probably join a 
bimetallic league but for the opposition of England, who, as the great 
creditor-nation, declines to take a step destined to cheapen the sort of 
coin in which debts are to be paid her. 

6 See § 87. 



CHAPTER II 
paper currency in the united states 

§ 137 Early 

Knox, United States Notes, chaps, i, ii. Bryant and Gay, U. S., vol. iii, 1071 n. 132 
sqq. Greene, Historical View of the American Revolution, 143, aiid Lect. v [best 
brief account]. Bancroft, U. S. [last revision], vol. vi, 167 sqq. 

Down to the Revolution the paper money of Amer- 
ica consisted in various kinds of credit bills issued by 
the colonies, which became so depreciated ^ that Mas- 
sachusetts gave up, and Parliament finally forbade, 
their issue. After the Declaration of Independence 
both Congress and the states returned to them, putting 
forth such amounts that at the close of the Revolu- 
tion they were 99j^ per cent below par. 

1 The pupil must bear in mind to distinguish colonial paper money from 
colonial hard money [§ 133, n. 2]. The depreciation mentioned in the 
present § [cf. Walker, Wages, 16], was in nearly all or all cases additional 
to that spoken of in § 133, n. 2. Mass. first uttered credit bills in 1690, 
after the attack on Port Royal. Greene, 143, Bancroft, vol. ii, 262 sq. 

§ 138 Thence to the Civil War 

Macleod, Diet, of P. E., vol. i, 170 sqq. ' Banking,' in Lalor; do. in Encyc. Brit. 

i From this time till 1863 banking was practically 
free, any banking corporation being permitted to issue 
bills on condition of obeying certain easy requirements, 
and promising to redeem in coin on demand. Paper 
was over-issued. Immense numbers of banks failed, 
particularly in 18 14, 18 19 and 1837. Suspensions of 



PAPER CURRENCY IN THE UNITED STATES 2O9 

specie payment were frequent. The loss in bills of 
broken banks is thought to have averaged during these 
years some five per cent of the circulation annually, 
ii About 1840, a plan was adopted in Jfew York State, 
which became in 1863 the basis of the national bank 
scheme.! It arranged that any person depositing with 
the state government good securities to the minimum 
amount of $50,000, and any corporation depositing 
$100,000, might issue an amount of notes equal to the 
deposit. This plan was far preferable to the policy of 
the other states, yet liable to many objections. The 
Suffolk bank system was another step in the right 
direction. New England banks depositing funds with 
the Suffolk, in Boston, for the redemption of their 
notes. If funds from any bank failed, notes were de- 
clined and the state of such bank became publicly 
known. 
1 See § 141. 

§ 139 Government Paper 

Knox, United States Notes, chaps, iv sqq. Powers, ' Greenback in the War,' Pol. Sci. 
Quar., vol. ii. 'Money' in Am. Encyc. Atwater, Princeton Rev., Jan., 1882. 
Ronne, ' Zivangscours der Nordanierikanischen Tresorscheine,' in Viertel- 
jahrsch. f. Volksw., 1863, vol. ii. Bolles, Financial H. of U. S. i86i-'8s, bk. i, 
chaps, iv, V. 

United States treasury notes had been issued in 
1 8 12, 1837 ^"^^ 1S57, bearing interest, but not for gen- 
eral circulation and not legal tender. In i86i, at 
the opening of the civil war. Congress allowed the issue 
of fifty million in similar notes,! payable on demand, 
without interest, heralds of those immense greenback 
issues, amounting at one time to more than four hun- 
dred million dollars, which, being made legal tender 
for all payments save duties on imports, did so much 



210 PAPER CURRENCY IN THE UNITED STATES 

to place and keep our national finances, till January i, 
1879, on a basis other than coin, thus greatly aggra- 
vating the nation's burden.^ 

1 On the character of these old demand notes, Knox, 71 sqq. 

2 The government made a great mistake in not, by marketing bonds at 
any price, keeping our money at the gold par. The debt was nearly all 
contracted [bonds sold] in depreciated dollars, which had to be paid 
in coin or its equivalent. Besides this the national banks [§ 141] should 
have been forced to buy new bonds. Adams, Pub. Debts, 166 sqq. See 
also 'The Currency Debate of i873-'4,' N. A. Rev., Jan., 1874. The green- 
back was at one time, July 11, 1864, 65 per cent below gold par. When 
the national bank act was passed in 1863, ^450,000,000 in greenbacks were 
already authorized and ^300,000,000 out. Gold stood at ^1.70. In 16 
months gold was ^2.80 — due in part, it is true, to national reverses, not 
•wholly to greenback issues. Specie payments were first suspended in view 
of war with England over the Trent affair, just at the end of 1861. On 
greenback prices of gold during the war, see chart in Bowen, Am. Pol. 
Econ. Best brief account of government paper issues in the war down to 
1879, is in Appleton's Annual Encyc. for 1879, where the pupil will also 
find an excellent history of the national debt at large to the same date. 

§ 140 Government Banking 

Bancroft, U. S., vol. vi, 25 sqq. Atwater, Princeton Rev., Jan., 1882. Sumner, An- 
drew Jackson. Royall, A. Jackson and the Bank of the U. S. Hildreth, U. S., 
vol. iv, ch. ii. 

Of national banking projects there have been three.^ 
i The Bank of North America began operations in 
Philadelphia, June, 1782, but after a most successful 
career of two years it changed its character to that of 
a state bank. This was done chiefly because of the in- 
competency of the then Congress to create corpora- 
tions. It still exists in the city of its birth, under its 
original name.^ The Massachusetts National Bank, in 
Boston, is of equal age. ii The first United States 
Bank went into operation in 1791, upon the plan of 
Alexander Hamilton. The national and state debts, the 



PAPER CURRENCY IN THE UNITED STATES 211 

latter having been already assumed by Congress, were 
funded into six per cent bonds, and three-fourths of 
every private subscription to the stock of the bank 
were required to be in these bonds. This raised na- 
tional credit. The bank, with its branches at various 
points, was also a source of great profit to stockholders, 
and, after twenty years, ceased to exist only because 
denied a new charter through the hostility of the 
now numerous state banks.^ iii The second United 
States Bank was chartered in 1816, on the same prin- 
ciples as the first. It was resorted to partly on account 
of the depreciation of national credit caused by the 
war of 18 12, partly by the terrible depreciation of state 
bank bills. Bad management at first, coupled with 
odium toward banks in consequence of the numerous 
failures in 18 19, rendered the bank unpopular. It was 
particularly obnoxious to President Jackson, who in 
1832 vetoed a bill for the renewal of its charter, to 
expire in 1836, and in 1833 caused it to relinquish* all 
the government's deposits, amounting to $10,000,000. 
These blows were fatal to the bank as national, though 
it secured a charter from Pennsylvania in 1836, and 
existed, languishing, till 1839. After 1836 there was 
no national paper money in circulation till the treasury 
notes of December, 1861. 

1 Not counting the national banks [§ 141], since the banking done by 
them is not the government's work. Government merely supervises it. 

2 Now again a national bank. It had been under a state charter ever 
since Jan. i, 1774, and so had the Mass. Nat. Bank. 

^ See Schouler, U. S., vol. ii, 316 sqq. 

* The deposits were not removed all at once. The new policy consisted 
in depositing no more, and gradually checking out, as needed, what was 
there. Sumner's Jackson has an interesting account of this controversy. 



212 PAPER CURRENCY IN THE UNITED STATES 



§ 141 The National Bank System 

Richardson, The National Banks [Harper's Half Ho. Ser.]. Bolles, as at § 139, bk. i, 
ch. xi, bk. ii, ch. iv. McCulloch, Men and Measures of Half a Century, chaps, xv, 
xvi, xvii. The National Bank Act, and other laws relating to Nat. Banks [Gov. 
Printing Office, 1889]. 

The present system of National Banks had origin 
in 1863, again in the interest of the national ex- 
chequer, suffering the drain of war. It was a plan 
for raising money by marketing government bonds. 
By it : i Notes of private and state banks are prohibi- 
tively taxed, ii At least one-fourth the capital of 
each bank must be in United States bonds deposited 
in Washington. iii The notes constitute a uniform 
currency, furnished and if necessary redeemed by 
government with the bonds in its possession. ^ iv The 
circulation is limited to ninety per cent in value of 
the bonds, and to the same proportion of the paid-up 
capital stock, whatever the size of the bank. v Each 
bank must keep a reserve of lawful money proportioned 
in size to the amount of its circulation, viz., twenty of 
thirty per cent ^ of this, vi The notes are legal tender 
from government except for principal and interest of 
the public debt and to government except for customs, 
but not between private parties. 

^ So that should a bank fail its notes would still be good. Notes thus 
often circulate some time after the banks issuing them have suspended. 
The U. S. treasury does not in such a case surrender to the creditors of 
the bank the last of its bo-nds till all the notes are redeemed. 

2 In the reserve cities, viz., those in w^hose banks the banks of smaller 
places may deposit, it is 30 per cent, elsewhere 20 per cent. In all cases 
5 per cent of the outstanding circulation has to be in the treasury at Wash- 
ington for the redemption of notes there. This is part of the reserve. 



CHAPTER III 
our paper currency in future 

§ 142 Present System 

McCulloch, 'Our Future Fiscal Policy,' N. A. Rev., June, 1881. Allison, ibid., June, 
1882. Scott et al., ibid., Sept., 1885. Atwater, ' The Fut. Paper Mo. of this Coun- 
try,' Princeton Rev., Jan., 1882. Neill, ' Legal Tender Question,' Pol. Sci. Quar., 
June, 1886. 

The theoretical faults of the national bank, (i) its 
basis, credit^ instead of cash, (ii) temptation to over- 
issue,2 (iii) double interest,^ (iv) admission of balances 
and of clearing-house and United States deposit certifi- 
cates * as part of the * lawful money ' reserve, have not 
wrought sensible mischief in practice. On the other 
hand, (i) the unchallenged currency of the bills all over 
the land, (ii) their steadfastness at gold par, (iii) the 
difficulty of counterfeiting- them, and (iv) the infallible 
certainty of their redemption,^ have inspired a very 
general wish to perpetuate the system. 

1 Viz., in the form of bonds. See § 141, ii. In the panic of May, 1884, 
all sorts of government bonds fell several per cent, materially altering the 
status of banks. But recovery was very speedy. Any political event 
abroad which sends home our foreign-held bonds has the same effect. 

2 No single bank can issue more than its share, but there is no legal 
limit to the number of banks in the country. The danger here signalized 
must be slight so long as the government maintains specie payments, since, 
if too many national bank notes are at any time in circulation, they can be 
presented for redemption, and if this takes place in greenbacks [one form 
of 'legal money'] instead of gold, these, too, may be turned into gold. 
Whether or not under these circumstances there can be inflation is the 
same question we touched at § 91 and notes. 

3 The bank draws interest on all the bonds constituting its capital 



214 OUR PAPER CURRENCY IN FUTURE 

[§ 141, ii], and at the same time uses its notes in discounting. This was 
at first a source of exorbitant profits, but for many years has not been so, 
as shown by the widespread disposition of banks to surrender their bonds 
for cash to use in discounting, this assuring them greater gains than the 
bonds yield. 

* Balances due from other banks, and the gold certificates mentioned at 
§ 86, n. I, 

^ See § 141, iii. 

§ 143 Difficulties 

Reports of the Secretary of the Treasury, December, 1888 and 1889. 

Growth of national credit having advanced the value 
of long bonds and made possible the refunding- of the 
others at a low rate, banks begin to prefer relinquish- 
ment of circulation to the interest of the bonds needed 
to retain it. Several measures have been propounded 
for the prevention of contraction from this source, 
and for the maintenance of the national bank circu- 
lation till the entire debt shall have been cancelled. 
Of these the following most deserve mention : (i) to 
remove the ninety per cent limit ^ on circulation, fixing 
this at the par or perhaps at the market value of the 
bonds deposited, (ii) to refund ^ the fours and four and 
a halfs into two and a halfs with an equal time to run, 
recouping holders by the present worth in cash of the 
interest given up, (iii) to repeal the one-half of a per 
cent tax on circulation, (iv) to transform the entire 
annuities now attaching to the fours and four and a 
halfs into separate bonds, in accordance with their 
present worth, then to unite these with the present 
fours and four and a halfs and issue new bonds to 
cancel both : the latter to be paid in series year by 
year, thus affording an outlet for the accumulating 
surplus.^ 



OUR PAPER CURRENCY IN FUTURE 21 5 

1 The McPherson bill, passed by the Senate Feb. 28, 1884, killed in the 
House Jan. 15, 1885. 

2 The Aldrich bill, brought before the Senate of both the XLVIII and 
the XLIX Congress, but never passed. The Potter bill, contemporane- 
ously moved in the House, proposed to exchange the 3's [now paid ofQ 
as well. 

8 Plan set forth by H. C. Adams, in the Forum for Dec, 1887. Its very 
great advantage over the others lies in the steadiness and regularity with 
which it would utilize the government's needless revenue for the lessening 
of the debt. 

§ 144 Proposed Change of Basis 

Report of Secretary of the Treasury, December, 1886. 

The last of our national bonds, the fours, being call- 
able on July I, 1907, and the bulk of the others, viz., 
the four and a halfs, on September i, 1891, and it being 
unlikely that the debt will be kept in existence merely 
to furiiisli basis for banks, none of the above schemes 
offer other than temporary relief. Various suggestions 
are therefore made of possible substitutes for national 
bonds as security to bank circulation : consols, rentes 
or other foreign public paper,^ state, county or city 
bonds, bottom mortgages on real estate, etc. None of 
these could fully replace the present security. The 
best plan ^ yet propounded would (i) restrict the circu- 
lation of each bank to ninety per cent of its stock, 
(ii) make bills a first lien on all the assets of their 
banks and also on other property of stockholders to 
the value of 100 per cent of each one's stock, (iii) force 
each bank to keep with the United States Treasurer a 
coin reserve equal to 10 per cent of its circulation, 
(iv) force the united banks to guarantee each individual 
bank, and so (v) have bills of broken banks infallibly 
redeemable at Washington, as now. 



2l6 OUR PAPER CURRENCY IN FUTURE 

1 Mr, John Jay Knox, formerly Comptroller of the Currency, at one time 
favored the acceptance of foreign securities for this office. 

2 Drawn up by Hon. A. S. Hewitt. The essence of it was adopted by 
President John Thompson of the Chase Nat. Banii, N. Y. City, in his cir- 
cular of Jan., 1885, intended to influence public opinion and so Congress. 



§ 145 Probable Outcome 

Adatns, Pub. Debts, pt. il, ch. ii. Sylvester, as at § 136. 

This plan is ingenious, but has the defects of intri- 
cacy and of giving government too httle real control 
over bank assets to assure redemption in all cases. 
Preferable to it, people more and more believe, would 
be some scheme for the issue of notes directly toy 
government as greenbacks are issued now, only mod- 
elled more after the issue-department of the Bank of 
England.^ The great merits of such an arrangement 
would be efllciency, simplicity, and profitatoleness to 
government both negative^ and positive. Objections: 
It would be unconstitutional. But the Supreme Court 
has decided otherwise.^ Inelastic. Somewhat, but 
could easily be made less so than our present paper 
system. Facile means to inflation. It could add noth- 
ing to the povrer or to the inducement which Congress 
had to create the present treasury notes. Such a paper 
circulation could readily be made tributary to a plan 
for ideal money.^ 

1 Without, of course, the inelasticity of the Bank of England issues. 
There we find, (i) the circulation restricted to 15 million pounds above 
specie in vaults, otherwise free, (ii) every bill legal tender save from the 
bank itself, and instantly convertible. It would be advisable to have no 
absolute maximum or minimum of circulation. The business should be 
regulated by an able and impartial commission, a majority of them not 
bankers, empowered to suit the volume of notes to the needs of the country 



OUR PAPER CURRENCY IN FUTURE 21J 

according to the principle of § 87. This idea is as old as Ricardo [Pro- 
posals for a Secure Currency], who moved to vest the power of issuing 
paper money in commissioners appointed by the ministry but removable 
only on address by one or both houses of Parliament. 

■^ The negative advantage would consist in relief from the expense and 
risk of supervising the present complicated system. For the positive, see 
§ 78 and n. i, § 86 and notes. 

" Virtually, in Julliard vs. Greenman. See Knox, U. S. Notes, chaps, 
iii, iv, xi; James, in Pubb. of Am. Ec. Ass'n, vol. iii, 49 sqq.; Bolles, as at 
§ 139, bk. ii, ch. i; McCulloch, as at § 141, ch. xv. This case to be sure 
related directly to the legal tender quality of notes redeemed and paid 
out again under the act of 1878. It pronounced that act constitutional. 
More certainly so would be the notes we propose, which ought not to be 
legal tender at all. It is the non-observance of this which creates so much 
prejudice against government paper money. People mistakenly conceive 
such paper as necessarily a forced loan. That Mr. Goschen, Chancellor 
of the Eng. Exchequer, intends an issue of English greenbacks, may perhaps 
be taken as some proof of the innocuousness of such money. See Budget 
Speech, Lond. Times, Ap. 19, 1889. Observe in particular that we z.Aso- 
cate only /r(7wmory, not fiat greenbacks [§ 93]. We need not remark 
that the execution of the above proposal would in no wise interfere with 
the regular and most profitable business of banks, viz., that of discounting. 



CHAPTER IV 

taxation 

§ 146 General Principles 

Ad. Smith, bk. v. Leroy-Beaulieu, Theo. des Finances, bk. ii. Schoenlerg, Hand- 
buck der Pol. Oek., vol. iii. Cossa, Taxation. Cooley, Law of Taxation. Mill, 
bk. V, ch. ii. Nicholson, ' Taxation,' in Encyc. Brit. 

i Taxation, as topic in Economics, relates partly to 
Distribution, partly to Consumption, to neither exclu- 
sively.i ii The generic principle to be followed in 
taxation is : sufficiency of revenue in highest possible 
consonance with the general good. Subordinate ab- 
stract principles of so-called right, as mortmain, cus- 
tomary privilege, etc., are hence to be respected ^ only 
within the above limit. Also, while the equalization 
of wealth is no part of the purpose of taxation, inci- 
dental tendency to this in any plan of taxation should, 
ceteris paribus, give it preference over competing plans, 
iii Taxes should be, so far as is possible and consistent 
with their main aim, (i) definite in amount and as to 
time and manner of payment, (ii) levied and collected in 
the way most convenient to payers, (iii) made to take 
from the payer as little as possible beyond what 
reaches tlie treasury, (iv) arranged to encourage, not 
discourage, industry, inventiveness, intelligence, taste, 
and whatever ennobles national life.^ 

1 The civil, military, and naval personnel is made up, theoretically and 
largely in fact, of producers, who receive [gross] wages. Taxation to meet 
this outgo comes under Distribution. But all waste through governmental 



TAXATION 219 

act, as well as all outlays on behalf of art and science, are referrible to 
Consumption. 

2 By legislators, that is. Assessors and collectors must of course proceed 
according to the laws, whatever they are. 

^ These are in substance the rules which have come down from Adam 
Smith, book v, ch. ii, pt. ii, reproduced by all subsequent writers upon 
finance. Cf. Walker, in P. E,, ch. on Taxation, for one or two excellent 
modifications. 



§ 147 Direct and Indirect Taxes 

Mill, bk. V, chaps, iii-vi. Cossa, Taxation, pt. iii. James, ' Customs Duties,' in Lalor. 

Taxes are direct or indirect according as they are 
assessed upon the very parties from whom they purport 
to be collected, or upon other parties, as manufactur- 
ers, importers, etc., who indemnify themselves out of 
the consumers by adding taxes to prices. Indirect 
taxes, viz., customs and excises, are in favor because, 
being identified in the minds of consumers with the 
prices of commodities,^ they are easy to collect. They 
are objectionable as unduly burdensome to the poor,^ 
particularly if specific instead of ad valorem, since 
they are rated rather according to population than ac- 
cording to property. If laid, they should bear lightly 
on necessaries, moderately on comforts, more heavily 
on luxuries. 

1 People pay, falsely thinking them to be part of the cost-and-handling 
prices of the articles bought, not surmising that they are settling their tax- 
accounts with the nation. 

2 To yield much revenue they must be placed on goods that are some- 
what popularly consumed. Specific duties aggravate the evil because, 
being fixed at about so much on the value of the medium quality of the 
article, they are of course imduly high on the poorer qualities, which alone 
poor people can buy. 



220 taxation 

§ 148 Norms of Direct Taxation 

?Frt//4^r, ' Principles of Taxation,' Princeton Rev., July, 1880. H. George, Prog, and 
Poverty, blcs. vii sqq. Ely, Taxation in Am. States and Cities. ' Taxation in U. S.' 
[4 artt.], New Englander, 1884. Ford, ' Reform in Taxation,' Int'l Rev., vol. xiii. 

Five specific principles easily suggest themselves as 
possible bases for direct taxation, (i) property in general, 
(ii) expenditure, (iii) productive ability, (iv) income, 
(v) non-capital property. Taxation upon any of the 
first four is either unjust, or impracticable, or both.^ 
The main category of non-capital property is land 
proper, viz., land aside from improvements — an emi- 
nently fit bearer of heavy taxation.^ However, (i) to 
keep taxation perceptible by the people,^ (ii) to avoid 
the inevitable injustice of any single tax,* (iii) to com- 
pass the requisite elasticity of revenue,^ and (iv) to 
insure disciplinary power over refractory or extortion- 
ate businesses, other taxes besides a tax on land are 
needed : customs duties, excises, and taxes on general 
income. 

1 Not to mention the injustice in principle of a general property tax, 
which would in effect involve a penalty on thrift, such a tax absolutely 
cannot be equitably assessed or collected, such is the proportion of per- 
sonal property which can easily be, and will be, concealed. See Ely, as 
above, also in Rep. of the Md. Tax Commission, 1887. See, too, the 1872 
Rep. of the N. Y. State Tax Commissioners. The exact expenditure of fami- 
lies is rarely known even to themselves. A tax on productive ability, were 
it only feasible, would certainly involve much justice. But suppose, as is 
too often the case, the ability has been unused? Much is to be said for an 
income tax, and it is the favorite of all the great writers on finance, some 
of whom advocate it to the exclusion of every other form. But experience 
in Gt. Britain shows that even this tax cannot be fairly collected, so easy 
is the falsification of income returns. 

2 To this extent H. George is clearly right. Land cannot be hidden, 
while its true value can in most cases be determined with relative ease. 
Moreover, all people are dependent directly or indirectly upon the land, 



TAXATION 221 

and hence must, through the principle of * repercussion ' [Cossa, Taxation, 
62], help pay part of a land tax whether themselves land-owners or not. 
A good deal of this equity obviously attaches to a real estate tax, which 
would be an infinite improvement over the general property tax now sought 
to be carried out in most of our states. 

3 That popular institutions may prevail government must be forced to 
solicit the people for funds, which would not be necessary so long as taxes 
were furnished in plenty by economic rent, as H. George and the single 
land tax theorists propose. This principle, ably discussed by Adams, Pub. 
Debts, 22 sqq., we have not seen appealed to in the land tax controversy. 

* No particular tax can possibly be levied save with injustice here and 
there, weighting this man too heavily, the next too lightly. A single-tax 
system exaggerates every such unfairness to the utmost, while by burdening 
many things you tend to offset losses by gains. 

^ Any tax can on occasion be reduced, but few are the sorts of taxes 
which can be at once suddenly and safely elevated, producing no shock. 
Liquor taxes well answer this requirement. So do income taxes, which 
Gt. Britain has usually resorted to in such emergencies. Not, however, in 
the most recent case, Mr. Goschen's budget of April, 1889, introducing 
instead a death tax on estates of over ;i^lo,ooo, 

§ 149 Taxation of Income 

Cohn, ' Income and Property Taxes,' Pol. Sci. Quar., vol. iv. Mill, bk. v, ch. ii, sees. 3, 4. 

The following rules ^ should govern the incidence of 
an income tax : i Up to a given amount, income should 
not be taxed at all. ii The percentage should slowly 
increase according to the amount of income, iii In- 
come from capital should pay a greater percentage 
than salaries or wages, iv Income arising without 
labor and risk should pay a greater percentage than 
other. Thus, all considerable legacies, except to near- 
est relatives, should be well taxed, the rate increasing 
with prospect of their unproductiveness. 

1 Involving the so-called ' progressive ' [or ' degressive '] principle of 
income taxation. Fawcett in his Manual opposes this, but on insufficient 
grounds. 



222 taxation 

§ 150 Emergency Taxation 

Mill, bk. i, ch. v, sees. 8, 10. Adams, Pub. Debts, pt. i, ch. v; pt. ii, ch. i. 

Extraordinary public expenditure should, unless very- 
great, usually be covered by immediate extra taxation 
instead of by loans, as slight extra taxes will be to a 
great extent paid out of non-capital wealth, not ab- 
stracting from the support of labor, while loans com- 
monly prey upon capital. But if the projected outgo 
is vast, resort may well be had to a loan, more particu- 
larly if this promises to be largely taken up abroad.^ 

1 This is not the place for full discussion. Read Adams, as above, or 
the proper chapters in any of the regular works on Public Finance. 



CHAPTER V 

POVERTY 

§ 151 The First Class of Remedies 

Davis, ' Labour and Labour Laws,' in Encyc. Brit. H. George, Prog, and Poverty; 
Social Problems. Cherbuliez, pt. ii, bk. iii. Mill, bk. iv, ch. vii. H. Spencer, 
Man vs. the State. Suntiier, What Social Classes Owe Each Other. Rae, Con- 
temp. Socialism, last 2 chaps. ' Charity' [several artt.], in Lalor. Graham, The 
Social Problem. Warner, Pop. Sci. Mo., July, 1889. 

Of the remedies popularly suggested for poverty, 
some are expected to raise wages, others to operate 
directly. The latter are poor laws and private charity. 
Experience, especially in England, has proved the abso- 
lute necessity, both economic and moral, of refusing 
charitable aid except to prevent actual and decided 
want. To make sturdy paupers comfortable is to 
put a premium on indolence, a penalty on industry.^ 
The work of organized charity, on the other hand, 
hunting out and shaming or punishing impostors, find- 
ing — not making — work for the healthy workless, and 
prudently aiding those truly needy, is in the highest 
degree advantageous both economically and morally. 

1 See § 16, n. 6, H, Spencer [also Sumner], as above, vividly shows 
the inexpressibly baneful results of coddling worthless human beings so as 
to enable them to propagate their kind. But society has a duty to such. 
It should, if possible, reform them both economically and morally. Peek, 
in Contemp. Rev., Jan. and Feb., 1888, and Manning, ib., Mch. The 
Charity Organization Societies in several of our largest cities are doing 
excellent work toward this end. On this interesting subject, Warner, as 
above, writes well. 



224 POVERTY 

§ 152 The Second Class 

Mill, bk. ii, chaps, xii, xiii; 'Claims of Labour' [in Dissertations]. Leroy-Beaulieu, 
Question ouvriere au xixietne siecle. Ely, Labor Movement in America. Mc- 
Neill, et al.. The Labor Movement. Gmitoji, Wealth and Progress. 

Here come the measures intended to raise wages: 
(i) strikes, (ii) trades-unions, (iii) legislative enact- 
ments upon wage-rates or hours of labor, (iv) demand 
that wages be paid when business can go on only with 
loss, (v) demand that idle wealth be turned into capital. 
Strikes and trades-unions are per se both legitimate 
and often useful, but call for the utmost discretion and 
self-control in management, i Strikes, unless general, 
fail, usually fail if general unless on a rising market,^ 
and at any rate when not successful, possibly even then, 
limit production 2 and so wages, ii Trades-unions, so 
far as they endeavor to control wage-rates simply by 
limiting the supply of labor, hinder general prosperity, 
and hence general wages,^ in the same way as most re- 
strictive tariffs do. iii The legislation referred to, im- 
portant and desirable as it often is, may easily be so 
framed as to prove either futile or mischievous like 
the above, iv Paying wages at a loss is charity, also 
the destruction of capital, putting farther off the day 
when wages proper can be paid. But firm, temperate 
and wise labor agitation, with or without these particu- 
lar means, may do much to better wages, in the way 
pointed out at § 118. 

1 In March, 1888, during the greatest snow blockade ever known in 
N. E., when 12 locomotives were stalled in New Haven and no trains passed 
between that city and N. Y. for 3 days, 200 shovellers employed by the N. Y., 
N, H. & H. R. R. at Meriden struck for an advance of from 21 1 to 50 cents 
pay an hour. It is needless to say that they were retained. How modern 



POVERTY 225 

systems of industry favor the success of strikes, see § 45. To the considera- 
tions there mentioned we may add this that nearly all manufacturers now 
work on orders, which they are under contract to fill at such and such 
times, A greater proportion of strikes [38 per cent] and strikers [50 per 
cent] succeeded in 1888 than in any preceding year [Bradstreet's, Feb. 2, 
1889], due, however, in large measure to greater moderation in striking, 
and the consequent greater justice of demands. From 1881 to 1886, inclu- 
sive, strikes occurred in 22,304 establishments in the U. S., and 1,323,203 
employees were engaged in them. At the same time 160,823 employees 
were locked out. Of all these strikes 9,439, or 42 per cent, were for 
increase of wages, 4,344, or 19.48, for reduction of hours, 1,734, or 7.77 per 
cent, against reduction of wages, 1,692, or 7.59 per cent, for increase of 
wages and reduction of hours. Wages or hours had most to do with more 
than 77 per cent of the strikes, and nearly 4 per cent more were influenced 
by the same causes coupled with others. Of the strikes for higher wages 
66 per cent were successful and 8.43 per cent were partly successful. Of 
the strikes to secure a reduction of the hours of labor about 47 per cent 
were entirely or partly successful. On the responsibility of both employers 
and employees to the public, Carl Schurz, in N. A. Rev., Jan. and Feb., 1884. 
Why laborers cannot compete with landowners in a strike, Prog, and Pov- 
erty, 282 sqq. 

2 The aggregate losses caused by the stoppage of work during the three 
weeks of struggle in the southwestern strike of 1 866, were placed at ^30,- 
300,000 : $3,000,000 in wages which 250,000 strikers threw away, $2,500,- 
000 sacrificed through interruption to the business of employers, $4,400,000 
lost in deferred industrial contracts, and $20,400,000 in building contracts. 

3 Advantaging their members at the expense of the laboring population 
in general. 

§ 153 Ultimate Help 

Patten, The Consumption of Wealth [see, above, § 124]. Bilgratn, Iron Law of Wages. 
Fawcett, Manual of P. E. 

The capitalizing of idle wealth ^ promises much, and 
would promise far more but for a sadly convincing induc- 
tion which teaches that when material betterment does 
chance to come to the ignorant poor, as through a rise 
of wages or the cheapening of bread, it is instantly 
cliecked by increased population. However great rela- 



226 POVERTY 

tive relief 2 may be hoped from the measures named 
above, or from co-operation ^ in its various forms, private 
and public, and zealously as all should strive to multiply 
and promote such helps, the economic elevation of the 
poor will prove to be ultimately an ethical and an 
educational work.* Their great wants are, (i) a moral 
one, the will to restrict population where necessary,^ 
check vicious appetites, and act unitedly,^ (ii). an intel- 
lectual one, knowledge of economic and social laws, 
that they may assert claims wisely. Aids to these, 
the only final relief of indigence, are, (i) the Chris- 
tian religion, which, rightly understood, includes all 
true morality, (ii) sympathizing public opinion, and 
(iii) compulsory education. This last is equally called 
for by the logic of free schools. 

1 See § 131. 

2Cf. § 118, n, 4. 

^ On co-operation, Somers, 'Co-operation,' in Encyc. Brit.; Block, do. 
in Lalor; Holyoake, H. of Co-op. in Eng.; Marshall, Ec. of Ind., bk. iii, 
eh. ix; Giddings, in McNeill's ' Labor Movement ' ; Fawcett, Man., bk. ii, 
ch. x; Cairnes, Leading Prin., 289 sqq.; Co-op. in U. S., Johns Hop. Univ, 
Stud., Vlth ser. Very much more has been written. A great deal may be 
expected from the co-operative movement, though probably less than many 
think [§ 123, end]. Profit sharing is the most promising phase of co-op- 
eration [best treated in Oilman, Profit Sharing betvv^een Employer and 
Employe ; cf. Quar. Jour. Econ., vol. i, 232, 367] except perhaps co-opera- 
tive banking and [virtually the same thing] co-operation in building and 
loaning [Dexter, Co-operative Building and Loan Associations]. On the 
excellent working of the various sorts of Friendly Societies, as the Odd 
Fellows, etc., a sort of co-operation, see Quarterly Rev., April, 1888. 

* The more necessary to emphasize this because the fact is so commonly 
ignored in favor of nostrums or at best partial measures. Indefinite credit 
utilized as money is Hugo Bilgram's remedy [§ 92, n. i]. 

^ The general question of Malthusianism [* Population,' in Lalor] we do 
not here touch. All apart from this, it is perfectly obvious that very many 



POVERTY 227 

families would be in every way better off with fewer members. For the 
intelligent and well-to-do not to be celibates is, even by the principles of 
Malthus, a duty. 

6 How many strikes and promising labor movements fail through selfish 
ambition and treachery! While these prevail the employer will have 
laborers at his mercy. 



